The effects of personal information on competition: Consumer privacy and partial price discrimination

This article studies the effects of consumer information on the intensity of competition. In a two dimensional duopoly model of horizontal product differentiation, firms use consumer information to price discriminate. I contrast a full privacy and a no privacy benchmark with intermediate regimes in which the firms can profile consumers only partially. I show that with partial privacy firms are always better-off with price discrimination: the relationship between information and profits is hump-shaped. In particular, competing firms prefer to target consumers with partial but asymmetric information about preferences. Instead, consumers prefer either no or full privacy in aggregate, but the effects of information on individual surplus are ambiguous: there are always winners and losers. Finally, I study the information acquisition incentives of the firms when there is an external data seller. When this upstream data broker holds partially informative data, an exclusive allocation arises. Instead, when data is fully informative, each competitor acquires consumer data but on a different dimension. These findings are relevant for the strategic decisions of firms active in digital markets and contribute to the policy debate surrounding privacy, exclusive access to data and competition.