Future Internet Assembly, Budapest, May 2011
Economics of Privacy in the Future Internet
Competition in
Markets for Personal Information
Dr. Nicola Jentzsch
DIW Berlin
Disclaimer:
Privacy is a human right.
Thinking about it in economic terms
does not change this basic fact.
2
Private information – Information that is not common knowledge. This
must not necessarily be personal information.
Personal information – Information that is associated with an identifiable
individual. This must not necessarily be private information.
Definition.
Privacy is a state of asymmetric distribution of personal
information among market participants.
I. Conditions for Existence of Personal Information Markets
Conditions for information markets
Mechanism design
II. Consumer Choice
Valuation of personal information
III. Competition in Markets for Personal Information
Competition strategies
Customer lock-in
4
I.
Conditions for Existence for Personal Information Markets
Conditions for Information Markets
1. Property rights to personal information
To commodify personal information, property rights must be
specified
2. Infrastructure
Technical or other infrastructure for transfer of personal data
3. Incentives to trade personal information
Firms must have an incentive to collect and trade consumer
profiles; consumers must have an incentive to disclose
personal data
I.
Conditions for Existence for Personal Information Markets
Conditions for Information Markets
Property rights
Bundles of rights define action space
Bargaining power
Without commitment
 Compensation rules
 Rent transfers
 Externalities
F
C
TP
Action
With commitment
C
F
TP
I.
Conditions for Existence for Personal Information Markets
Conditions for Information Markets
Insights from Economic Theory (Hermalin and Katz 2006)
Firms offer products based upon consumers’ signal of type
Two types of consumers (high, low), they signal  , 
(I) Firms hold PR
> Can compel consumers to disclose signal
> All consumers disclose signal
(II) Consumers hold PR
> Firms write incentive-compatible offers
> Consumer decide whether to reveal
> High type disclose signal
I.
Conditions for Existence for Personal Information Markets
Mechanism Design
Ecosystem of exchange mechanisms
Social exchange
Intermediation
Direct sale
Auctions
I.
Conditions for Existence for Personal Information Markets
Mechanism Design
Problems
• Unclear definitions or imperfectly specified property rights lead
to excessive trade of personal data
• Firms have an incentive to strategically impact on consumer
foresight, shrouding their action options in privacy policies
• Lack of salience of information transaction exacerbates situation
• Consumers are unclear about their reservation price for their
personal information
II.
Consumer Choice
Valuation of personal information
Benefits
u
EUi (.)  v{  b  ( 1p 4c 4k ( 4i,d)


c
2 4 4 4( 3i ))
Privacy calculus
Benefit
Costs
Costs

Function maps betting preferences
of individuals regarding uncertain
outcomes
v = valuation of good
b = benefit from personal.
p = price
c = costs of data disclosure
β = sensitivity re disclosure
d = data set
μ = probability of event
II.
Consumer Choice
Valuation of personal information
Influences on privacy calculus
u
EUi (.)  v{  b  ( 1p 4c 4k ( 4i,d)


c
2 4 4 4( 3i ))
Benefit
Social comparison
Costs
Anchoring at reference points
Salience (priming)

Firms have an incentive to influence comparison, referencing &
salience, impacting on consumer foresight and utility
III.
Competition in Markets for Personal Information
Competition strategies
Compilations of consumer
profiles impact on:
Firms’ strategies as well as competition intensity and distribution
of social welfare.
Firms’ strategies change to:
 Targeting with personalized offers
 Behavior-based pricing
 Social sorting (classification based upon similarities)
III.
Competition in Markets for Personal Information
Competition strategies (Lee et al. 2005)
Differentiated duopoly
Consumers have heterogeneous

1 
A
privacy concerns (high/0 costs)
Privacy-unconcerned (λ) choose personalized offers
All others receive uniform offers from A, B
Outcome:
•
Firms set high prices for personalized offers (low for standard)
•
Prices rise, if segment with unconcerned consumers increases
•
Price competition intensifies with more anonymous consumers
B
III.
Competition in Markets for Personal Information
Customer lock-in
Personalization increases fit with consumer preferences
Decreases willingness-to-switch (loyalty)
Endogenous: function of 1st-period purchase, i.e. transportation costs &
lost benefits (Pazgal & Soberman 2008)
Exogenous: function of network effects
Firms use euphemistic language to shroud lock-in effects
Salience on benefits and not on less obvious lock-in effects
If personalization costs outweigh benefits, sophisticated consumers
will strategically invest in anonymity.
III.
Competition in Markets for Personal Information
ENISA P/34/10/TCD Project
An Economic Model for the Pricing of Personal Information
Question: What’s personal information worth to consumers and
does disclosure of personal data produce lock-in?
Duopoly model with privacy-heterogeneous consumers
- Static and dynamic model
Behavioral experiment with real economic transactions:
- Implementation in the lab (website)
- Implementation as field experiment (website)
Final results expected in September 2011.
Vielen Dank für Ihre Aufmerksamkeit.
DIW Berlin — Deutsches Institut
für Wirtschaftsforschung e.V.
Mohrenstraße 58, 10117 Berlin
www.diw.de
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