Privacy in Competitive Markets
AbstractPersonal privacy is studied in the context of a competitive product (or labor) market. In the first stage of the game, firms that sell homogeneous goods or services (e.g., insurance, credit, or rental housing) post prices they promise to charge approved applicants. In the second stage, each consumer chooses whether to apply to one of the firms. Next, the firms acquire information about their applicants and sell the good to the ones they approve. Contracts are incomplete in the sense that the amount of information firms acquire cannot be observed. In the unique subgame perfect equilibrium outcome, firms post the lowest price consistent with zero economic profit. Unfortunately, this low price gives them incentives to acquire excessive amounts of information about their applicants. It is shown that this inefficient infringement of privacy is exacerbated if firms have the opportunity to sell customer information. Also, in an effort to preserve privacy, consumers typically demand inefficiently low levels of output. Finally, it is shown that if rejected consumers can continue to apply for the good at different firms, then the resulting adverse selection may seriously undermine the market and generate a situation in which all parties would be better off if no information was collected at all.
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Bibliographic InfoPaper provided by Duke University, Department of Economics in its series Working Papers with number 03-10.
Date of creation: 2003
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Find related papers by JEL classification:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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- Alessandro Pavan, 2004.
"On the Optimality of Privacy in Sequential Contracting,"
Theory workshop papers, UCLA Department of Economics
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- Giacomo Calzolari & Alessandro Pavan, 2005. "On the Optimality of Privacy in Sequential Contracting," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1404, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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