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What Should a Firm Know? Protecting Consumers' Privacy Rents

Author

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  • Daniel Bird
  • Zvika Neeman

Abstract

A monopolistic firm observes a signal about the state of the world and then makes a take-it-or-leave-it offer to an uninformed consumer who has recourse to some outside option. We provide a geometric characterization of the firm's information structure that maximizes the consumer's surplus: the optimal regime partitions the space of payoff states into polyhedral cones with disjoint interiors. We interpret our results in terms of the maximization of the consumer's "privacy rent." We illustrate and motivate our approach through the example of the regulation of the privacy of medical information in monopolistic health insurance markets.

Suggested Citation

  • Daniel Bird & Zvika Neeman, 2022. "What Should a Firm Know? Protecting Consumers' Privacy Rents," American Economic Journal: Microeconomics, American Economic Association, vol. 14(4), pages 257-295, November.
    • Handle: RePEc:aea:aejmic:v:14:y:2022:i:4:p:257-95
    DOI: 10.1257/mic.20200215
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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