Managing consumer privacy risk: The effects of privacy breach insurance

Inappropriate management of information security of e-commerce websites exerts a negative effect on consumers’ purchase decisions because it may cause consumer data leakage. To mitigate this negative effect, some e-commerce firms such as Taobao in China voluntarily offer privacy breach insurance to consumers. Even though this fresh management of information security is becoming popular in practice, there are still rare academic studies concerning this hot topic. To fill this gap, this paper constructs a multi-stage game-theoretic model to examine the impacts of privacy breach insurance on a monopoly firm and to identify the market condition under which the firm would like to employ privacy breach insurance. We find that when consumers’ data leakage concern is low and firm’s data leakage possibility is low, privacy breach insurance always encourages more consumers to purchase. Otherwise, privacy breach insurance stimulates purchase only when the compensation of privacy breach insurance remains high. Furthermore, we reveal that the monopoly firm would provide privacy breach insurance when consumers’ data leakage concern remains low. These fresh results suggest that privacy breach insurance acts as an efficient measure e-commerce firms could take to address increasingly serious information security threats.