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A model of information security and competition

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  • de Cornière, Alexandre
  • Taylor, Greg

Abstract

Cyberattacks are a pervasive threat in the digital economy, with the potential to harm firms and their customers. Larger firms constitute more valuable targets to hackers, thereby creating negative network effects. These can be mitigated by investments in security, which play both a deterrent and a protective role. We study equilibrium investment in information security under imperfect competition in a model where consumers differ in terms of security savviness. We show that the competitive implications of security depend on firms' business models: when firms compete in prices, security intensifies competition, which implies that it is always underprovided in equilibrium (unlike in the monopoly case). When firms are advertising-funded, security plays a business-stealing role, and may be overprovided. In terms of policy, we show that both the structure of the optimal liability regime and the efficacy of certification schemes also depend on firms' business model.

Suggested Citation

  • de Cornière, Alexandre & Taylor, Greg, 2021. "A model of information security and competition," CEPR Discussion Papers 16457, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16457
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    References listed on IDEAS

    as
    1. Esther Gal-Or & Anindya Ghose, 2005. "The Economic Incentives for Sharing Security Information," Information Systems Research, INFORMS, vol. 16(2), pages 186-208, June.
    2. Sam Ransbotham & Sabyasachi Mitra, 2009. "Choice and Chance: A Conceptual Model of Paths to Information Security Compromise," Information Systems Research, INFORMS, vol. 20(1), pages 121-139, March.
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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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