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

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  • Bouckaert, J.M.C.
  • Degryse, H.A.

    (Tilburg University, Center for Economic Research)

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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2006-96.

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Date of creation: 2006
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Handle: RePEc:dgr:kubcen:200696

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Keywords: privacy; price discrimination; monopolistic competition; welfare;

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  1. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  2. Calzolari, Giacomo & Pavan, Alessandro, 2006. "On the optimality of privacy in sequential contracting," Journal of Economic Theory, Elsevier, vol. 130(1), pages 168-204, September.
  3. 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.
  4. 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.
  5. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242.
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  9. V. Bhaskar & Ted To, 2002. "Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry," Economics Discussion Papers 537, University of Essex, Department of Economics.
  10. Qihong Liu & Konstantinos Serfes, 2005. "Imperfect price discrimination, market structure, and efficiency," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1191-1203, November.
  11. Posner, Richard A, 1981. "The Economics of Privacy," American Economic Review, American Economic Association, vol. 71(2), pages 405-09, May.
  12. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
  13. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
  14. 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.
  15. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  16. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
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  18. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
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