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Competing with Privacy

Author

Listed:
  • Ramon Casadesus-Masanell

    (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

  • Andres Hervas-Drane

    (Cass Business School, City University London, London EC1Y 8TZ, United Kingdom)

Abstract

We analyze the implications of consumer privacy for competition in the marketplace. Firms compete for consumer information and derive revenues both from consumer purchases as well as from disclosing consumer information in a secondary market. Consumers choose which firm to patronize and how much personal information to provide it with. We show that firms maximize profits by focusing on a single revenue source and competing at the extensive rather than the intensive margin, outperforming competitors by attracting a larger customer base. We also show that competition drives the provision of services with a low level of consumer information disclosure (high level of privacy), but higher competition intensity in the marketplace need not improve privacy when consumers exhibit low willingness to pay. Our findings are relevant to the business models of Internet firms and contribute to inform the regulatory debate on consumer privacy. This paper was accepted by Bruno Cassiman, business strategy.

Suggested Citation

  • Ramon Casadesus-Masanell & Andres Hervas-Drane, 2015. "Competing with Privacy," Management Science, INFORMS, vol. 61(1), pages 229-246, January.
  • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:1:p:229-246
    DOI: 10.1287/mnsc.2014.2023
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    References listed on IDEAS

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