Endogenous privacy and heterogeneous price sensitivity

This study analyzes a model in which two firms, one with profiling technology and one without, compete for old and new markets. In the old market, consumers leave their personal information online, whereas, in the new market, consumers do not. When a firm with profiling technology observes consumers' personal information, it sets personalized prices for them. Additionally, consumers can conceal their personal information by paying privacy costs. We introduce heterogeneity in price sensitivities among consumers into our model. We obtain the following result. For greater heterogeneity in price sensitivities, consumer and total surpluses are maximized with no privacy cost; for lower heterogeneity, a sufficiently high privacy cost is desirable for consumers and society; for intermediate heterogeneity, while consumers prefer no privacy cost, total surplus is maximized at a sufficiently high privacy cost. Therefore, when deciding on privacy policy, authorities should consider the heterogeneity in price sensitivities.