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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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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
Contact details of provider: Web page: http://www.NETinst.org/

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  1. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  2. Drew Fudenberg & Jean Tirole, 1998. "Upgrades, Tradeins, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 235-258, Summer.
  3. Curtis R. Taylor, 2004. "Consumer Privacy and the Market for Customer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 631-650, Winter.
  4. Oliver D. Hart & Jean Tirole, 1987. "Contract Renegotiation and Coasian Dynamics," Working papers 442, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Greg Shaffer & Z. John Zhang, 2000. "Pay to Switch or Pay to Stay: Preference-Based Price Discrimination in Markets with Switching Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 397-424, 06.
  6. Alessandro Acquisti & Hal R. Varian, 2002. "Contidioning Prices on Purchase History," Microeconomics 0210001, EconWPA.
  7. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  8. Alessandro Pavan, 2004. "On the Optimality of Privacy in Sequential Contracting," Theory workshop papers 658612000000000067, UCLA Department of Economics.
  9. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
  10. Schmidt, Klaus M., 1993. "Commitment through Incomplete Information in a Simple Repeated Bargaining Game," Munich Reprints in Economics 19778, University of Munich, Department of Economics.
  11. Martin L. Weitzman, 1980. "The "Ratchet Principle" and Performance Incentives," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 302-308, Spring.
  12. J. Miguel Villas-Boas, 2004. "Price Cycles in Markets with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 486-501, Autumn.
  13. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  14. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 173-191.
  15. Taylor, Curtis R., 2000. "Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," Working Papers 00-12, Duke University, Department of Economics.
  16. Nancy L. Stokey, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 355-371.
  17. Stephen W. Salant, 1989. "When is Inducing Self-Selection Suboptimal for a Monopolist?," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 391-397.
  18. 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.
  19. Yongmin Chen, 2006. "Marketing Innovation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 101-123, 03.
  20. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
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