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Abstract

When firms can identify their past customers, they may use information about purchase histories in order to price discriminate. We present a model with a monopolist and a continuum of heterogeneous consumers, where consumers can opt out from being identified, possibly at a cost. We find that when consumers can costlessly opt out, they all individually choose privacy, which results in the highest profit for the monopolist. In fact, all consumers are better off when opting out is costly. When valuations are uniformly distributed, social surplus is non-monotonic in the cost of opting out and is highest when opting out is prohibitively costly. We introduce the notion of a privacy gatekeeper --- a third party that is able to act as a privacy conduit and set the cost of opting out. We prove that the privacy gatekeeper only charges the firm in equilibrium, making privacy costless to consumers.

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File URL: http://www.netinst.org/Taylor_Wagman_08-26.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 08-26.

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Length: 35 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:net:wpaper:0826

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Web page: http://www.NETinst.org/

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Keywords: Privacy; price discrimination; anonymity; opt-out; e-commerce;

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References

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  18. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  19. Sue H. Mialon, 2008. "The Effects of the Fourth Amendment: An Economic Analysis," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(1), pages 22-44, May.
  20. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
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