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Opt In Versus Opt Out: A Free-Entry Analysis of Privacy Policies

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Author Info
Jan Bouckaert ()
Hans Degryse ()

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Abstract

There is much debate on how the flow of information between firms should be organized, and whether existing privacy laws should be amended. We offer a welfare comparison of the three main current policies towards consumer privacy — anonymity, opt in, and opt out — within a two-period model of localized competition. We show that when consumers find it too costly to opt in or opt out, privacy policies shape firms’ ability to collect and use customer information, and affect their pricing strategy and entry decision differently. The free-entry analysis reveals that social welfare is non-monotonic in the degree of privacy protection. Opt out is the socially preferred privacy policy while opt in socially underperforms anonymity. Consumers never opt out and choose to opt in only when its cost is sufficiently low. Only when opting in is cost-free do the opt-in and opt-out privacy policies coincide.

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Publisher Info
Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 1831.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1831

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Related research
Keywords: privacy price discrimination monopolistic competition welfare

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Find related papers by JEL classification:
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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References listed on IDEAS
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  1. Posner, Richard A, 1981. "The Economics of Privacy," American Economic Review, American Economic Association, vol. 71(2), pages 405-09, May. [Downloadable!] (restricted)
  2. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242. [Downloadable!] (restricted)
  3. Calzolari, Giacomo & Pavan, Alessandro, 2006. "On the optimality of privacy in sequential contracting," Journal of Economic Theory, Elsevier, vol. 127(1), pages 168-204, September. [Downloadable!] (restricted)
    Other versions:
  4. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring. [Downloadable!] (restricted)
  5. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
    Other versions:
  6. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer. [Downloadable!] (restricted)
  7. George J. Stigler, 1980. "An Introduction to Privacy in Economics and Politics," University of Chicago - George G. Stigler Center for Study of Economy and State 10, Chicago - Center for Study of Economy and State.
  8. Curtis R. Taylor, 2004. "Consumer Privacy and the Market for Customer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 631-650, Winter.
  9. Richard A. Posner, 1980. "The Economics of Privacy," University of Chicago - George G. Stigler Center for Study of Economy and State 16, Chicago - Center for Study of Economy and State.
  10. Mark Armstrong, 2005. "Recent Developments in the Economics of Price Discrimination," Industrial Organization 0511004, EconWPA. [Downloadable!]
  11. V. Bhaskar & Ted To, 2004. "Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 762-776, Winter.
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  12. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn. [Downloadable!] (restricted)
  13. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter. [Downloadable!] (restricted)
  14. Jeffery M. Lacker, 2002. "The economics of financial privacy : to opt out or to opt in?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-16. [Downloadable!]
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