Economics of Privacy in the Future Internet

Competition in Markets for Personal Information

Future Internet Assembly, Budapest, May 2011

Dr. Nicola Jentzsch

DIW Berlin

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Disclaimer:

Privacy is a human right.

Thinking about it in economic terms does not change this basic fact.

Definition. Privacy is a state of asymmetric distribution of personalinformation among market participants.

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.

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

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Conditions for Existence for Personal 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 Information Markets

I.

Property rights

Bundles of rights define action space

Bargaining power

CC FF TPTP

CC FF TPTP

Without commitment

With commitment

Compensation rules Rent transfers Externalities

Conditions for Information Markets

Conditions for Existence for Personal Information Markets

Action

I.

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

Conditions for Information Markets

,

(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

Conditions for Existence for Personal Information Markets

I. Mechanism Design

Social exchange

Intermediation

Direct sale

Auctions

Conditions for Existence for Personal Information Markets

Ecosystem of exchange mechanisms

I. Mechanism Design

• 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

Conditions for Existence for Personal Information Markets

Problems

Consumer Choice

Valuation of personal information

II.

Privacy calculus

Benefits

Costs

€

EUi(.) = v + bBenefit{ − ( p + c k (βi,d) + μc u(βi)

Costs1 2 4 4 4 3 4 4 4 )

v = valuation of good b = benefit from personal. p = pricec = costs of data disclosureβ = sensitivity re disclosured = data setμ = probability of event

Function maps betting preferences of individuals regarding uncertainoutcomes

Consumer Choice

Valuation of personal information

II.

Social comparison

Anchoring at reference points

Salience (priming)

Firms have an incentive to influence comparison, referencing &

salience, impacting on consumer foresight and utility

Influences on privacy calculus

€

EUi(.) = v + bBenefit{ − ( p + c k (βi,d) + μc u(βi)

Costs1 2 4 4 4 3 4 4 4 )

Competition in Markets for Personal Information

Competition strategies

III.

Firms’ strategies change to: Targeting with personalized offers Behavior-based pricing Social sorting (classification based upon similarities)

Firms’ strategies as well as competition intensity and distribution of social welfare.

Compilations of consumer profiles impact on:

Competition in Markets for Personal Information

Competition strategies (Lee et al. 2005)

III.

Differentiated duopoly

Consumers have heterogeneous

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

A B

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Competition in Markets for Personal Information

Customer lock-in

III.

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 consumerswill strategically invest in anonymity.

Competition in Markets for Personal Information

ENISA P/34/10/TCD Project An Economic Model for the Pricing of Personal Information

III.

Question: What’s personal information worth to consumers anddoes 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 Institutfür Wirtschaftsforschung e.V.Mohrenstraße 58, 10117 Berlinwww.diw.de

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