Reputation for Privacy

As consumers become increasingly concerned about their privacy, firms can benefit from committing not to sell consumer data. However, the holdup problem prevents firms from doing so in a static setting. This paper studies whether reputation consideration of the firm can serve as a commitment device in a long-run game when consumers have imperfect monitoring technology. We find that a patient enough monopoly can commit because its reputation will suffer from a persistent punishment if consumers detect the data sale. In contrast, reputation may fail to serve as a commitment device when there are multiple firms. The penalty for selling data is temporary when consumers do not know exactly which firm sold the data. In addition, selling data imposes a negative externality on other firms, but each firm does not take it into account in equilibrium. We characterize conditions under which duopolistic firms lose the ability to commit even if they are arbitrarily patient. Reputation cannot serve as a commitment device under any conditions as the number of firms increases because each firm is penalized less for selling the data but not rewarded more for not doing so. Lastly, we explore several ways of restoring firms’ commitment power through regulation.