Econ Paper - Privacy

An Economic Model of Privacy: A Property Rights Approach to Regulatory Choices for Online Personalization Author(s): Ramnath K.
Chellappa and Shivendu Shivendu Source: Journal of Management Information Systems, Vol. 24, No. 3 (Winter, 2007/2008), pp. 193-225 Published by: M.E. Sharpe, Inc. Stable URL: http://www.jstor.org/stable/40398901 . Accessed: 15/04/2013 22:13
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An EconomicModel ofPrivacy: A Property Rights Approachto ChoicesforOnline Regulatory Personalization

RAMNATHK. CHELLAPPAAND SHIVENDU SHIVENDU
Ramnath K. Chellappa is anAssociate Professor ofDecision andInformation Analysis Business He atthe Goizueta served onthe School, Emory University. previously faculty ofMarshall SchoolofBusiness, ofSouthern from 1997to2005. California, University the Dr.Chellappa's hisPh.D.from ofTexasatAustin. He received University expertise ofelectronic andeconomics ofinformais inthefield markets, digital goodspricing, His research onpiracy tion andprivacy. hasbeenwidely inleading security published His work on information in and conferences. online transactions privacy journals Award theBestPaper atINFORMS-CIST2003. Professor works received Chellappa with on topics related toforecasting, themusic closely industry piracy, supply-chain sales. He currently and iTunes/digital teachesin theMBA and Ph.D. management, and he and a course on IT andmedicine at recently designed taught programs Emory at the of intheMedicalManagement Southern California. University Program Associateand Visiting Lecturer at theGoizueta Shivendu is a Research Shivendu in theDepartment and a Ph.D. candidate of BusinessSchool,EmoryUniversity, He received an MBA from the of Southern California. Economics at theUniversity anda B.Tech, from theIndian Institute Institute ofManagement, Indian Ahmadabad, totheIndian Administrative Service He belongs ofTechnology, (IAS), memKanpur. ofthegovernment in India.His research work in thehighest echelons bersofwhich of information, intellectual are in thearea of economics interests rights, property of natural and privatization incentive theory, regulation monopolies, e-governance, indeveloping countries. ininformation-acquisition andtheincreasing straAdvances Abstract: technologies a market forconsumers' ofthisinformation havecreated personal tegicimportance Behavioral research that consumers information. andpreference suggests engagein off their costs from information trade calculuswhere a privacy they privacy sharing a formal economic modelof this their valuefrom Through personalization. against we examinewelfare implications by (p4p) trade-off, personalization-for-privacy utilities as "no-free-disposal" functions. We investigate consumption characterizing allowance/disallowance ofusageoffour theoptimality regulatory regimes (through the interaction and contracts) private by analyzing strategic technologies, enforcing "free ofcharge" andtwo whooffers services a monopolist between personalization - privacy and convenience seekers. Whilemany consumer privacy watchdog types our research restrictions and moreregulation, groupshave called fortechnology is better off with of over their that assignment property rights broadly suggests society toconsumers andfull information allowance oftechnological control andcontractual
Journal /Winter 2007-8,Vol.24, No. 3, pp. 193-225. ofManagement Information Systems 2008 M.E. Sharpe, Inc. 0742-1222/2008 $9.50 + 0.00. DOI 10.2753/MIS07421222240307
194
CHELLAPPA AND SHIVENDU
the contracts areproscribed, abilities for themonopolist. when However, reguprivate lator should alsoprevent the of particularly technologies, deployment usage-enforcing unlike seekers. ofprivacy when themarket is predominantly Interestingly, composed should a regulator free for markets traditional disposal, goodswith price-instrument butalso ofconsumers' thismarket's notonlyencourage p4ppreferences knowledge tothevendor. ofpreference information thevarious uses andbenefits Nashbargaining, Keywordsand phrases: economic incentives, personalmodeling, socialwelfare. ization, rights, privacy, property
thatprivacy consumers can reassure The FTC [FederalTradeCommission] conaboutboth with We arean agency willbe honored. knowledge promises We concerns. consumer address the markets sumer and privacy way protection consumer oflawsprotecting willincrease ourenforcement privacy. - Timothy TradeCommission oftheFederal Chairman J.Muris, should and"Ifso,what ourprivacy?" jeopardize Thequestions "Does personalization as a result of raisedin thelegalcommunity thelaw do aboutit?"havebeenrecently andpersonalization ininformation advances [48]. technologies acquisition significant attwoplaces:(1) information is offered online goodsthat Commonly, personalization of investment suchas management are personalized to individual tastes, portfolios and(2) serand of music custom bundles and software, through personalized portals booksto ofvirtually all goods,from andpurchase vicesthat theselection accompany In both vendors online which arealso personalized cases,in electronics, [6]. bymany needsto share theconsumer toone's tastes, a service orproduct order topersonalize thevendor. with andpreference information hisorherpersonal aregenerally theseservices is that An important aspectof onlinepersonalization services evenif offered not use all ofcharge. consumers offered free However, may of about the concerned are to be value as privacy they personalization, they likely sharein order to use theseservices[49]. Such a privacy theinformation that they is often freeservices rationale behind concern is indeedvalidbecausethebusiness for such as ofconsumers' basedon theexploitation information, pricing preference andtargeted advertising.
Motivation
information Withtechnologicaladvances,therehas beena call forregulating suchas the collection and usage by onlinefirms. watchdog groups, Manyprivacy Interest U.S. Public for Center (CDD; www.democraticmedia.org), Digital Democracy Information and Electronic Research Privacy Group(U.S. PIRG; www.uspirg.org), information theviewthat Center havetaken (EPIC; www.epic.org), privacy-related
AN ECONOMIC MODEL OF PRIVACY
195
with thesamealacrity should be treated as wouldbe price/ bya regulator acquisition In theUnited in many other markets. theregulatory States, publicutilities quantity is tasked with the the Federal Trade Commission interests of (FTC) protecting body incommercial online and those transactions that an individual (both offline) including that concerns. CDD andU.S. PIRG contend current involve However, privacy privacy overthelastseveral disclosure "Unfortunately, inadequate, years policiesaretotally of the the critical electronic theFTC has largely developments marketplace ignored TheFTC should ofevery American atrisk. that haveplacedtheprivacy longago have - andcalledfor - concerning action thedatacollection a very sounded publicalarm as Web online from such fields networks, analytics, advertising stemming practices of rich 'virtual all which threaten the and behavioral media, privacy reality' targeting, that shouldbe moreregulated: of theU.S. public"[9]. EPIC also suggests privacy serious threats toprivacy andarenotaddressed by technologies represent "Emerging that "with the The or law" [20]. presssuggests rapidgrowth popular self-regulation lawmakers and consumers alikeare becoming and recreation, of onlinecommerce and disclosure of personal information aboutthecollection concerned increasingly the stillhas of United States the overtheInternet. enormity coverage, press Despite most to online scheme no unified Furthermore, [42,p. 2]. privacy" protect regulatory not do of for more 57-87 also ask regulation; only percent publicpollson privacy should thegovernment ofa privacy pass more regulations pollfeelthat respondents current laws do not conalso feel that but for (38-63 protect percent) privacy many is the nature of of interest therefore The sumers [43]. regulation question adequately context. intheonline socialwelfare willenhance that privacyas information Generally,researchin economics has interpreted of their and price that consumers' is, preferences knowledge private asymmetry discrimination. a in from vendors Indeed, price engaging first-degree prevents points consumers this recent probably acknowledges gap: "whilemost paperin economics on ... here focuses for the havean inherent analysis presented preference privacy, insurance is relevant to formalization Such [44,p. 632]. studying pricing" dynamic where information orother rates, asymmetry goodsandservices mortgage premiums, is relatively there little outcomes affects andbuyers sellers between [10]. However, for in that the concern this as discussed of online formal is, paper; privacy analysis one that has been to an individual and is that intangible, unique subjective, privacy is not of thistype of privacy concern The impact exacerbated byonlinecommerce. buta general need to be freefrom to immediate withregard pricediscrimination information overhowtheindividual's as well as control "excessive intrusion," may of is best this concern The of shared." or be "used by thedefinition captured spirit on National Statistics [16],a governmental body bytheCommittee provided privacy information: "Informational individual-level andsharing ofcollecting hasa history that in thequest intrusion from excessive freedom an individual's encompasses privacy and circumstances choose the extent to individual's and an of information ability with willbe shared andattitudes hisorherbeliefs, which under behaviors, opinions inmind, definition we seektoidentify this from others" orwithheld [16,p. 22]. With in markets for information. approaches regulatory optimal
196
ourresearch areconsistent those from oneoftheearly with Interestingly, questions andSelftitled commissioned ofCommerce Privacy reports bytheU.S. Department "Given that of to in contributors the One asks, report Regulation Information Age. that information and that is to so technology given people, privacy important many to deal with should be adopted newquestions, whatapproach privacy keepsraising wastoresort theprimary In thepast, ifremedies wereconsidered, strategy problems? is a natural andprotect toregulation. Thecall for thestate tocontrol response privacy the around their in the electronic field of communications, history given especially ortightly orbroadcast world as either a state-controlled regulated monopoly telephone issuesandendswith a number ofregulatory sector" further examines [29].Thisreport or havebeenregulation, "Thereflexive toprivacy thequestion, problems approaches Arethere denial. other options?" one roleofa or utilities, in other suchas telecommunications markets, Generally, is tocurb such as the Federal Commission Communications (FCC) regulatory body excessivevendor and this is often by prescribing pricecaps, accomplished power, trade andmonitoring other restrictive collusion, Extending practices. price prohibiting be vendors should that this roleto markets for information might suggest regulatory for fear of or collection at least from information limited) (or usage, privacy proscribed less aboutmoreversus conflicted theFTC has beensomewhat violations. However, more Atone end,whiletheFTC has sought [35],its authority regulatory regulation. ofthe members Twoofthefive owncommissioners havebeentroubled bythis aspect. wrote with the first Commissioner Orson Swindle FTC dissented the of report. findings calls flawed" a longdamning dissent inwhich hestated that the"embarrassingly report broadlaws"[35]. So for "extensive "breathtakingly government regulation" through a that an important how choose should a is, protects regulatory body regime question consumers' the of online commerce? concerns while not privacy limiting growth
Overview
different Ourpaper that markets for consumer information arefundamentally suggests from traditional markets. The informationbuyer-seller price-quantity-instrumented context is a or One more akin to privacy system. perhaps trading regime bartering of online is it is offered for so from users' that free, keyaspect point personalization of view, information is exchanged for a vendor's services and,from personalization services are offered are to acquireinformation. In a sense,bothagents perspective, endowed withsomeinherent number market in that a vendor limit the may power of services offered anda consumer less than thenumber of maychooseto consume services available lessthan themaximum amount ofinformation (henceprovide posfor available free. is without not feasible sible),though Intrinsically, personalization dina of services is notfeasible without information, sharing personal freeallowance someexploitation ofthisinformation bythevendor. Research on thelegalandethical is not ofprivacy has argued that aspects privacy a fundamental orabsolute In it is a human, moral, rather, [39]. right; prudential right in the U.S. has been treated as a fact, judicialcontext, privacy largely subjec"highly
197
a matter oftradeoffs tive andcontingent andbalanced interests" [5,p. 14]. commodity, also suggests that consumers are morelikely Behavioral research to acceptloss of an important ifitaccompanies somebenefit contribution [23]. In this regard, privacy is theeconomic formalization ofthis ofourresearch so as to nonmonetary exchange for a regulator. socialwelfare-maximizing approaches investigate consumers a property to their information where are Ourmodelassigns right they for certain benefits based on some calculus" to trade it The [13]. "privacy willing to theregulator aremodeled available alternatives (1) Allowalongtwodimensions: that enforces a ance oftechnological (a) allowtheuse ofa technology enforcement: and service level disallow the use of enforcement techconsumer's (b) agreed-upon contracts: to buyinformation (a) allow vendors (2) Provision forprivate nologies. hisorherpersonalization willshare to satisfy needs what a consumer that is beyond from In the and disallow vendors information. absence contracts) (b) buying (private oftheregulatory intuition lead one andanalysis structure ofa formal problem, might be bad for thesociety that enforcement tobelieve bytheir design might technologies inprivate contracts tobuyinformation. from should be prohibited orvendors engaging these andarrive at results, someof allowsus compare Ourformal options modeling to intuition. arecounter which
Model
if inthemarket for Thefocusofourresearch isto ident yoptimal regulator strategies is in intervention need for the information. regulator greater monopolistic Generally, can be quitesevere. on consumer welfare where themonopolist's markets impact is an online where there under a monopoly, forinformation a market We consider services a setofpersonalization whosellssomegoodz andoffers vendor alongwith thegood.
andPrivacy Information for The Market

for information markets customer theneedtoexamine toward research Recent points is an active it that "there has been where of privacy in thecontext [44], suggested servedby such web-basedmarketing information consumer forpersonal market as Double ClickandI-Behavior" firms [37,46] notethat [44, p. 632]. Others many individual identifiable and anonymous collectand sell bothpersonally onlinefirms and preference information. The forpersonal of a market information suggestive number ofpersonalized services andtheincreasing ofonline (in portals proliferation and MSN such as offered for Yahoo, information) Google, majors byportal exchange of services In addition, of thismarket. to thegrowth is a testament personalization and is also a product that very prevalent experience browsing/purchase accompany an online vendor suchas ofonline is an important [6],as, for example, selling aspect to data various that Amazon.com personalized mining techniques provide employs andother recommendations totheconsumer. product/gift/shipping
198
duetothree Thismarket ofconsumer intheonline context information hasemerged suchas factors: data (1) Personalization techniques technologies: mining important andpreference can use personal rule-based and collaborative [36, 52] that filtering and or information behavior) browsing monitoring (acquiredvoluntarily through newdocumentneeds.Forexample, to an individual's future onlineservices tailor that facilitate Webpagesinto tomanage haveemerged categories clustering techniques access and browsing and subsequent document [50]. (2) Convenience management in opportunity value(andhencethereduction theconvenience to consumers: costs) free to one's own tailored services created tastes, particularly of by having myriad vendors thevaluethat access to information: (3) Vendor's placeon knowing charge. consumers' preferences. Personalization Technology or is shared on how muchinformation Whilepersonalization (voluntarily depends determine with the service technologies personalization provider, monitoring) through address to one'shome Forexample, howmany suchservices canbe offered. providing card orcredit when this information choosing shipping Googleallowsitto"autofill" to who subscribes to a user In with some vendors. addition, Google's Froogle options recommendations is also used to provide Web page,thisinformation personalized as wellas in thehomearea,mapsandtraffic formovielisting/timings information, Amazon.com's andtelevision information suchas weather common superior listings. for also allow discounts, recommendations, personalized personalization technologies But notall online behavior. based on browsing and shipping/gift coupons, options evenifthey services ofpersonalized arecapableofoffering thesamenumber vendors of consumer a amount information. For the same amount of be given may acquiring how determines information thelevelofpersonalization many personaltechnology is given Thisinformation-services izedservices canbe created. byg~l(i)= s, mapping and s is thepersonalization where/is customer's services, information, preference is the current state of g~'(.) technology. personalization that can be provided services We assumethatthemarginal rateof personalized to tailorservices as theability decreaseswithincreasingly personalinformation that becomesincreasingly difficult. Thisimplies g~](.) is concaveorg(.) is a convex in theabsenceof customer function. Because no personalization can be provided = can information setthat have and if / the entire we information, g(0) 0, represents we haveg~l(i) S, where be usedto describe then consumers andtheir preferences, state of S is themaximum service set for a technology. personalization possible given this transformation function will suit abstraction. Anyaffine Consumer's Trade-Off Personalization-for-Privacy on is infeasible to achievewithout loss of privacy Personalization [49]. Research information us that to disclosetheir informs consumers arewilling personal privacy decision to inexchange for someeconomic orsocialbenefits [8,23]. An individual's
199
is said to be basedon a "privacy calculus"that is theindividual's share information and costs from his or her information of benefits assessment [12]. sharing toa consumer from benefit services is captured Theprimary using personalization value for such that the benefit to a consumer p personalization parameter by marginal inthe number ofservices consumed. Prior andlinear research onservices is increasing consumers valueindividualized treatments. has argued that Thisresearch marketing ofservice is dependent that theperceived quality uponhowa consumer persuggests needs tobe met Personalized services can also hisorher individual reduce ceives [27]. andhence increase usersatisfaction value overload information [25].Theconvenience can also be understood as theopportunity costincurred that provides personalization This is in luxury in the absence of often observed an individual personalization. by where the of cost is extracted services and markets, allayment opportunity goods whohavea highopportunity costof Businessexecutives a pricepremium. through hotelsthat a premium butpersonalize to stayin high-end timeoften charge prefer andrequirements of to their tastes rooms andservices [26]. The importance specific to from individual another. Recent research one this convenience empirical mayvary valuefor influence inconsumers' variations finds that these personalization strongly touse online their intention [8]. personalization to an individual's is knownto be related to shareinformation The willingness intheir for individuals concerns ofdisclosure ofrisks [14],andthus vary perception is captured ineconomics research [44],privacy [8]. Inprior byanindividual's privacy andthecorresponding cost as private for a product valuation information, being kept the true valuation will the vendor that is theextra (thus charge uponknowing price In ourwork, we introduce an this to share does notwant theconsumer information). of s r such that the cost coefficient cost consumer's individual using personprivacy of Notethat thisabstraction is given i information alizedservices by ri2. bysharing as some intanwith our definition of is consistent costcoefficient privacy privacy thevendor ofwhat maydo with Independent byeach individual. giblecostsuffered hisorher consumer's belief the thiscoefficient thisinformation, regarding captures cost is assumed to be convex The information. in sharing comfort privacy personal information needsto be shared and increasingly is ordered as information personal theconsumer's services. more to use in order consumer the Hence, personalized by written as can be from netbenefit v.(s) =ps rg's). Notethat using personalization ins, sugand inverted concave)function (nonmonotonic strictly U-shaped vc(s)is an Thisutility better for a consumer. is notnecessarily moreservices that using gesting Ifa consumer derives a certain value ofgoodswith is characteristic no-free-disposal. for that the consumer if is the and the from z P(z) pays the price V(z) consuming good and the in the individual toan the net then personalized consuming goodz utility good, s is given services by U(z,s) = V(z)- P(z) + vc(s). for Free OnlinePersonalization ofOffering CostsandBenefits Vendor's butthey a priceforpersonalization do notdirectly Onlinevendors services, charge in The most obvious and direct from other benefits derive investing personalization.
200
value of consumer information is therevenue from or sellingpreference sharing information For example, to supply-chain and advertisers. many portals, partners notonlybecauseofthe to advertisers Websitesareattractive andother newspapers, acto create to thesitebutalso becauseof their number visitors reasonably ability has research efforts. Recent to customer curate advertising leading targeted profiles in acquiring of Web-based elaborated on therole and importance personalization as well information for other customer [30, 51]. important purposes from information transactional tonotonlyacquire Personalization allowsa vendor and about information butit also helpshimor herin acquiring browsing purchases transaction. intoa fiscal that other actions of theconsumer maynothavetranslated and his or hercompetitors from can help differentiate a vendor This information an efficient and create allowshimor herto understand demand, manageinventory, successto suchas just-in-time chain.Production (JIT)owe their paradigms supply is crucialfor information information. On themarketing end,customer managing of that It been and has discrimination strategies argued marketing segmentation. price informacustomer of detailed effective use on to and successful firms access depend tion[1,3, 12,17,32,34]. atthesamelevel.Thoseveninformation All online do notvaluecustomer vendors chain would andanefficient smaller inventories dorswhorely on maintaining supply to vendors better as customers on knowing their compared place a greater emphasis a homogeneous and mainly whocan manage inventories group target largeproduct with a real-time vendors that online ofcustomers. Forexample, ithasbeensuggested customer valuefor with havegreater chainandthose dealing digital products supply in such and delivery information due to the"on-demand" requirements production valuefor a marginal thisheterogeneity, we introduce environments [2]. To capture information that benefit from information a such a vendor's /, by acquiring parameter is ou services s, given ag(s). offering by or,equivalently, personalization there are is negligible; The marginal costofproviding an onlineservice however, ofcapital there arethree orone-time costs incurred vendor. types Broadly capital bythe - infrastructure, trust costsinvolved in providing services building, personalization arise from andinformation Theinfrastructure costsmainly orliability costs. protection andruleinvestments inpersonalization toolssuchas collaborative systems, filtering basedengines that arebuilt intocustomer (CRM) systems relationship management tocollect inretailers trust information [21].Theability [19], depends uponconsumer andthis is intrinsically trust linked tothe ofa firm [15,38,47]. Intheonline reputation ofa firm suchas can be enhanced activities world, reputation through trust-building alliances with trusted third reassurof mechanisms, parties, implementationsecurity ancesthrough disclosure andcompliance with also FTC rules[35].Vendors notices, needtoprotect theinformation intechnologiandstore. invest both they acquire They cal protection mechanisms a legalinfrastructure. The magnitude [24] andin having of theseinvestments is domaindependent sincetheU.S. Congress [35] stipulates andguidelines, suchas theChildren's OnlinePrivacy context-specific requirements Protection Act(COPPA) andtheHealth Act Insurance andAccountability Portability of information is (HIPAA) [4, 18,40]. As thenature personal acquired increasingly
20 1
costsareassumed tobe convex while ofservices, thecapital number with increasing remain an additional consumer costsofserving themarginal zero. thenetcapitalcostsareconvexin the We introduce a costcoefficient suchthat theprofit of services number total offered, (v) from given bys2.We can nowwrite = is a nonmonotonic services s as vv(s) ag(s) -s2.vv(s) strictly offering personalization in that is an interior such there function concave(inverted s, optimum U-shaped) to maxag(s) - s2,where is thesolution g"(s) < (2/a), givenby s* e (0,5) that whilevendors are stillfinding innovative behind thisis that ys. The intuition ways areevolving theinformation to use consumer information, acquisition technologies thefeasible set of personalizathat at a muchmorerapidpace. This wouldimply We can ideal number of services. than the vendor's is tionservices generally greater a goodz, andoffering from netprofit thevendor's nowwrite selling personalization from and C(z) is where s as n(z,s) = R(z) - C(z) + vv(s), services R(z) is therevenue thecostofproduct z.
Problem The Regulator's

anduse involves thecollection that transaction In theUnited States, anycommercial issuesalso oftheFTC. Privacy thelegalpurview under falls information ofconsumer andnongovernmental from other attention considerable receive entities, governmental across the of these The media. the protection spectrum; vary groups opinions including consumer information andarguethat sacrosanct whilesomeholdconsumer privacy inconsumer that it is now in notbe collected anyevent, should accepted generally conforms to andusedas longas thedatagathering can be collected formation entity While the FTC. recommended information thefair legislative by principle practices whatis to consumer discussthethreats bodiesandpopular privacy, pressroutinely ofideallegalframeworks ontheformulation debate is anacademic however, missing, rationale in the and economic thetechnological, takeintoaccount that behavioral, information. anduse ofconsumer collection is so toconsumer thethreat theFTC taketheviewthat should Forexample, privacy intheir information vendors off is better that severe acquisition byrestricting society is really information that consumer take the the FTC should Or approach strategies? therefore allow andshould ownsandthevendor that theconsumer a property values, There mutual this toexchange andconsumer the vendor agreements? through property influence vendor/consumer candirectly the aretwodimensions regulator alongwhich certain outcome: and thusthemarket behavior (1) by allowing/disallowing usageinformation of and (or "buying" technologies (2) byallowing/disallowing enforcing ofservices). selling services an ideal levelof personalization consumers As discussed earlier, prefer is it ratio. for their However, possible (p4p) personalization privacy upon depending suchas browsertousecertain consumers torequire for vendors technologies enforcing ofinformation to acceptmonitoring consumers can force (BHO) that objects helper still consumers Note that level. their be above that may signup touse preferred may still be as they levelof services thissuboptimal Many utility. enjoying positive may
202
Table 1. Regulatory Choices Allowance of

Technology for usage enforcement
Private contractual agreements

Regime 1 (R1) Vendor is not allowed to and "buy"information he or she is not allowed to use technologies that enforce usage. Regime 2 (R2) Vendoris not allowed to but "buy"information he or she is allowed to use technologies that enforce usage. Regime 4 (R4) Vendor is allowed to but "buy"information he or she is not allowed to use technologies that enforce usage. Regime 3 (R3) Vendor is allowed to and "buy"information he or she is allowed to use technologies that enforce usage.
with vendors toolbars BHOs, butitis therampant legitimate personalization employ hasbeena misuse ofsuchtechnologies that has led to spy wareconcerns. Thus,there of banordisallowance from ofprivacy for a complete clamor one section advocates tooffer incentives somevendors havealso begun these Further, (in the technologies. such form ofcoupons/discounts) for theusageofinformation-acquiring technologies it as toolbars, which to customer information. amounts Intuitively, literally "buying" the be best from these that a ban of vendor might strategies might appear summary with consumers' of view, in light ofconcerns associated society's point particularly andvendors' inthismarket. privacy protection monopoly power itis notclearifsuchan outright willbe welfare maximizdisallowance However, for two reasons: the nature of the function (1) (the ing utility uniqueno-free-disposal nonmonotonic concaveshape) might withsomecontrol, and endowtheconsumer research has sellers that contracts between and (2) prior legal maybe argued buyers the most for we tools information [48].Hence, formally appropriate protecting privacy examine welfare when a vendor is confronted with eachofthe implications regulatory inTable1. A popular outlined 1 is ideal that regimes perspective might suggest regime for theconsumer and is the 3 harshest. (society) regime perhaps To investigate thetrue nature of each of theregulatory in thefollowing regimes, we study a monopolist's andtheresulting consumer market section, optimal strategy andsocialwelfare. inthis we analyze ifthere areany taxation Further, context, surplus that could be the to benefit policies employed by regulator society.
andMonopolist Regulatory Regimes Strategies

We consider a vendor whocannotextractanyseparate for price premiums person- that alization theconsumer forusingpersonalization is, he or shedoes notcharge services. Thisis consistent with the ofonline vendors as Amazon.com or such strategies Barnes & Noble(www.barnesandnoble.com) that do not for explicitly charge providing
203
Table2. Objective Functions andStrategy Space space Strategy

Consumer Vendor Regulator s g [0,S]
function Objective
maxsps rg2(s) maxsag(s) s2 maxs{ps rg2(s) + ag(s) - s2}
Constraints
ps - rg2(s)> 0 ag(s) - s2 > 0 ps - rg2(s)> 0 ag(s) - s2 > 0
/g[0,/|
s>0
s>0
regime Regulatory g {R1, R2, R3, R4}
s>0
recommendation orother services. Whilethis consumer cannot personalized surplus vendors as prices, maintain thissurplus to theconsumer be extracted as ittranslates costs.Thus,inourmodel, to loyalty andincreased levels P(z) andservice switching forthevendor. decision variables As a monopolist, aretwoindependent thevendor inorder for willseta price us toexamine P(z) = V(z) suchthat U(z,0) = 0. Therefore, will be offered the we need to theportheservice levelthat by vendor, onlyconsider = from services tionof thevendor's profit personalization vv0) ag(s) s2and the - that that is derived from of the consumer's is,vc(s)= utility personalization portion vendor we first elaborate on the nature Before we of analyze strategies, ps rg2(s). inTable2. services as outlined theconsumer's usageofpersonalization and utility-maximizing Lemma 1: A consumer's maximum(s'Vc(Sc0)=0) are in theconsumer's number services increasing p4p ratio of (Sc^argmaxs{ps-rg2(s)}) (p/r). See the Proof: Appendix. ofconsumer inthismarfor behavior is a critical Thep4pratio analysis parameter theconsumer's indifference but also determines the ket.Itnotonlydetermines point or if has full freedom to choose his her the consumer behavior consumer's optimal is representative ofconsumers whoderive A large valueofthep4pratio level. service orpossess lowconcern for whereas services from benefits privacy, personalization high of the Based on is indicative valueofthis a lower privacy-sensitive types. parameter of twoconsumer a convenience a market to consist we define thep4p ratios, types; he or shewillprefer moreservices is highenough suchthat whosep4pratio seeker with a lowp4pratio suchthat hisorher seeker and&privacy than themarket offering than of services is lower the market number ideal,preferred (Definition 1). offering is such whose 1: Convenience seekers p4p ratio(p/r) (p4p) are those Definition > s* s* and the seekers number their that ofservices privacy utility-maximizing their number utility-maximizing of p4p ratiois suchthat (p4p) are thosewhose s* = argmaxjag(s) - s2}. s* < s*,where services levelfor thetwoconsumer with service therelative types preferred Figure1 shows level. service From a vendor's to the vendor's when optimal perspective, respect
204
^ 0
i'd
, ifa)
Services (5) Personalization
Functions oftheTwoConsumer Function oftheVendor andUtility Types Figure1. Profit

/= 0 /= 2 *= 3 /= 4
/=J
Regulator chooses regime
Vendor observes and regime consumer characteristics
Vendor determines serviceset tobe offered
Consumer chooses serviceset he or she will consume
Personaland preference information for exchanged personalized services
2. SequenceofEvents Figure
the consumer intheir for services, vary personalization types significantly preference is vendor shouldseekseparate for eachconsumer Suchan approach type. strategies inanexperience consistent with where a monopolist economics literature, goods prior market divides hisorherconsumers intooptimistic andpessimistic types depending and his or herproduct's overestimate or underestimate uponwhether they quality, have different for each ofthese consumer [41]. Others pursues very types strategies also used thisapproach such as when consumers of exploring strategies separate tastes overestimate andunderestimate thefit ofdigital [7]. Thetiming goodstotheir in Figure of strategic is interaction themonopolist andtheconsumer given between 2. Now we analyze themonopoly eachregulatory under regime. strategies
Regulatory Regime1
1 describes a setting theregulator restricts themonopolist where Regulatory regime from both cona usage-enforcing andfrom inprivate employing technology engaging tracts. Thisenvironment is descriptive ofsimple Web-based (with personalization no
205
the from thesetofservices orBHOs) where consumer self-selects offered toolbars fully Inourpersonalization the consumer doesnot vendor. value context, paya dollar bythe rather in the form his or her information. For a for but set pays given personalization his or her iftheconsumer information about then ofservices, provides preferences, he that aretailored tohisorhertaste. Whenno technological orshegetsservices usage willsimply is in place,theconsumer use hisor herutility-maximizing enforcement we can see that thisservice Fromtheshapeoftheutility levelof services. function, lower than the market whether the levelmaybe equal toor offering depending upon is stillincreasing ordecreasing at that consumer's point. utility
2 Regime Regulatory
where theregulator allowstheuse ofcookies, thesituation Nowconsider BHOs, and In this can be embedded insideofWeb pages and toolbars. that other technologies fixed number of services such a toolbar with a certain can create a vendor situation, for is monitored those installs the toolbar who a consumer that piecesof necessarily Forexample, information services). (andhence corresponding personalized provided will of services that be to the number choose allows consumers personalized Google cannot butusersof itsGmailservice on itstoolbar, personaloptoutof receiving scoursthrough a user'se-mail. that basedon a system ized advertisements actually a consumer whovaluesa RealAudioservice; thecase ofthefree consider Similarly, for various his or her indicate can radio service preferences voluntarily personalized information other forced to she can also be he or but music personal provide genres, inis compulsory), such that them indicates to fields an asterisk [*] next (often filling - without Yahoo e-mail theservice which as an e-mailaddress maybe unavailable. off(as thisis the the"cookies"feature turns if a consumer becomesunavailable tracks which thevendor mechanism usage). through seeker willoffer s* tothe 2: Under Lemma 1,a monopolist privacy (p4p) regime under seeker s* to theconvenience and offer regulatory regime (p4p), whereas s* to seeker tothe willoffer 2, themonopolist min{s,s*} (p4p)and offer privacy seeker theconvenience (p4p). See the Appendix. Proof: - that thevendor ofservices for number is the is,thevendor's utility-maximizing sv* is increasing seeker's the convenience and because services set of utility preferred of the offered the services at s *,he or shewilluse all of monopolist irrespective by is closelytiedto theregulaseeker oftheprivacy thebehavior theregime. However, setof services seeker's the definition, utility-maximizing privacy By tory regimes. Thenonmonotonic and ofthevendor. that levelis lessthan orhisorheridealservice from themarginal benefit that oftheconsumer nature concave utility implies strictly loss from the is services marginal providing outweighed by consuming personalization when the vendor above s' Under level at service information 2, regime any private will whether ornottheconsumer canenforce usage,he orsheonlyneedstoconsider
206
> 0, then If vc(^v*) willoffer thevendor s*, and sincethevendor's profit participate. to curveis alwaysincreasing at anyservice levelless than s*, he or she willprefer seekerwill use thatis, of servicesthattheprivacy offer themaximum number the of enforcement 1 in the under absence However, technologies, any regime 5c. in his or her market is unable to exercise personalization power offering monopolist - that level service willchoosehisorherpreferred as theprivacy seeker services is, the a wasteful abovethislevelwillimply his or hers*. As anyservices investment, s*. find toprovide willsimply itoptimal vendor 1 and2 (allowbetween be indifferent 1: Theregulator regimes may Proposition either under anceanddisallowance following ofthe technologies) ofenforcement twoconditions: - counter tointuition, seekers isprimarily (a) Themarket byconvenience defined theconon has no such a theallowance/disallowance bearing technology of convenience is the market when and social sumer, by defined welfare producer, seekers. inand themonopolist's seekers is primarily (b) Themarket byprivacy defined than is greater vestment inenforcement technologies vv(min{s,s*})vjs*). The with with vendor privacy only technologies enforcement gainsmonopoly power as in becomes this seekers consumer zero anymonopoly). (the type surplus of 1. should theregulator conditions are notmet, regime strictly prescribe Ifboth See the Proof: Appendix. andthenoof distribution of types PI is that a combination The intuition behind from the of the function can nature free-disposal utility prevent monopolist exercising theneedfor his or herpowerand thusobviating theneedforregulation. However, costsof sophisticated withthedecreasing mechanics becomesevident regulatory and of information can be to enforce certain levels that used monitoring technologies is where not in need where the the situation over time step regulator usage.So, only services increases theconsumers' needfor technological alongwith personalization to be borne a burden Whilethisis clearly of enforcing sophistication technologies. is that an alternate vendors of regulators possibility by personalization technologies, decreases concern inconsumer levelofprivacy invest education suchthat theoverall with ofpersonalization technologies. understanding increasing behavior as itmaypartly It is also critical us tounderstand theprivacy seeker's for that were based solely models on the Internet the failure of some business explain ande-tailers on their to acquireandsell customer information. Manyportals ability could on thenotion that evenifa product profits operate maybe sold at costprice, information. These still consumer be realized and through selling sharing preference willattract business models on theexpectation that intense price competition operate can be of consumers on them andtheir and information preferences largenumbers the so as tobe attractive andadvertisements. mined for Commonly, product placements toexaggerated valuation ofsomeofthese failure business models hasbeenattributed
207
itmayindeedbe that thefirms werefacedwith information. on customer However, levelofservices andtherefore seekers whoonlyusedtheir optimal provided privacy vendor's belowtheonline information expectations. canbe understood inanother Thecostofenforcement wayas well.Itcouldalso be is that vendor to without as theburden the willing placeon theconsumer interpreted willdisable a consumer's him Forexample, Microsoft orher. the fear oflosing Passport thus the user to but suchan of after a certain account reregister, period inactivity, forcing the user due to lost e-mail and inconvenience to be of action reconfiguration may great Thisraisesthepossibility the services. that andother ofstock personalized portfolio for services. abandon usermayaltogether Thus,eveniftheprovision using Passport themonopolist costsarealso nothigh, needs exists andtheinvestment enforcement in adopting suchtechnologies. on theconsumers theburden toconsider
3 Regime Regulatory
himor has highinformation Whena monopolist needs,he or she maynotrestrict needfor alone. consumers' information to acquiring herself personalization through to the other incentives The monopolist (in addition mayin factchooseto provide and even small monsuch as from convenience discounts, coupons, personalization), in use more services than to the consumer motivate to rewards, optimal perhaps etary Amazon, a purepersonalization-privacy including Manyonlinevendors, exchange. basedonconsumers' intheform ofdiscount incentives com,haveintroduced coupons From a privacy information. certain andsharing itsGoldBox services through clicking information to amount suchstrategies ofview, advocate through "buying" may point a regulator's concerns. andhence contract someprivate Thus,from point flag privacy ofallowance ofsuchprivate contracts theimplication one needsto evaluate ofview, willneedtoengage a monopolist services. offered Clearly, personalization alongwith to use beyond theconsumer he orshehas to incentivize in suchcontracts onlywhen * become ofenforcing thepresence/absence s and,as discussed earlier, technologies consider function. oftheutility nature duetotheinverted-U relevant Hence,we first contracts as wellas theuse ofenforcallowsfor theregulator 3 where private regime ingtechnologies. and theconsumer let thevendor Undertheallowanceof information "buying," thesecontracts We transfer a contract a in develop good (t). through private engage Ineconomics mechanism. a consumer andthe the between throughbargaining provider inwhich in situations is employed literature (1) thestrategic players [31],bargaining there beneficial a of have the (2) agreement, mutually possibility negotiating (agents) and no to which about of interest a conflict is may agreement conclude, (3) agreement are In ourcontext, when there their without on players be imposed explicit approval. At seekers. s* totheprivacy tooffer is forced thevendor noenforcement capabilities, in the number of is one this (vendor's) personalization surplus increasing point, agent's andhencethesecondand is decreasing, theother's while seeker's) services, (privacy is a conflict exist. There of aboveclearly as discussed for conditions third bargaining andduetolackofenforcement ofpersonalization thenumber around interest services,
208
theprivacy willnotuse anyservices seeker aboves* evenifhe or she capabilities, derives a positive inorder as required tocreate an agreement Therefore, utility. point and the we introduce thetransfer condition, good intoboththevendor by thefirst to receive a the consumer with that when consumer's the agrees utility, assumption the is monitored. vendor he to be transfer Thus, guaranteed payment, orshealsoagrees itis ofwhether theconsumer willuse all oftheagreed-upon services that irrespective that the vendor orlessthan Note that the transfer more theconsumer's good optimum. service level.We can now willdepend on theagreed-upon is nowwilling to provide as from thevendor rewrite andconsumer's personalization utility formally v,(j) = ag(s) - s2- t(j)
+ x(s). vc(s)=ps-rg2(s)
(1)
and Lemma3: In orderto determine theoptimal incentive (x(s))t thevendor overn(sB) maxj(vjs) + vv(s)) (vc(s*)+ vjs*))}, seeker willbargain privacy is theagreed-upon where thesolution to the maximization personproblem (sB) levelunder 3. service alization regime See the Proof: Appendix. arenotindepenInregime andthe consumer's 3,themonopolist's problem problem their utilities. ofeachofother maximize dent andhencewe cannot respective simply utilities as the combined the is also not one of Further, problem maximizing simply to enter into for both we also needa mechanism that theincentives provides parties to identify contracts. framework the we adoptan axiomatic Therefore, bargaining solution set as first states that there are described Nash The basic [28]. setting by who in a set or with each other and either reach an fail A, players agreement bargain to reachan agreement, in whichcase thedisagreement event D occurs. The setof all utility can be theoutcome ofbargaining is theunion oftheset0 ofall pairsthat = for a g A the and d where arethe pairs(,(0,u2(a)) point (u^D), u2(D)), w2(.) w,(.), utilities of theplayers in bargaining. The pair(0, d) is theprimitive of the engaged If there existsa bargaining solution to ourproblem, then our bargaining problem. solution should to a set 0 that satisfies the axioms of to invariance belong equivalent of irrelevant alterna(INV), symmetry (SYM), independence utility representations tives(IIA), andpareto (PAR) [31]. efficiency we construct ourset0, andformally describe thedisagreement d Therefore, point togettheutility The are constructed from set the of pairs(0,d). utility pairs possible event (setA) and thedisagreement seekers, (D). In thecase of privacy agreements thedisagreement D in context is sc' thepoint where theprivacy seeker feels point satisfied whilethevendor stills feelshe or shecan do better. Thisprocess canbe described as one where theprivacy seeker for some agreesto use somes > sj inreturn amount ofthetransfer is reached, then both will goodx.Andifno agreement parties - that revert to thepoint where theconflict of interest first is, s*- andthe appeared vendor willprovide no incentive ortransfer Hence,D can be forgoodat this point. = as D Now we the setA for mally represented [s*,0] (Figure 2). identify feasible theagents. The feasible setrepresents all possible from the agreement points starting
209
thevendor willoffer anys > s* andwill disagreement point{sc'0}. In ourcontext, from as atthe somext. as longas hisorherutility doingso is atleastas much provide set the will use the of services and consumers Similarly, accept point. disagreement is than or to what as their thetransfer utility greater equal they enjoyat good long set the andthe seekers thedisagreement Hence,ourfeasible {5,1} for privacy point. vendor should satisfy
VC(S) + T(S)>VC(S;) VV(S)-T(S)>VV(SC*). K >
is liesabovethefrontier for this incentive Thefeasible given byvc{s*' which region The convex of at the the consumers the shape disagreement point. increasing get utility from is because, after theutility the consumer curve for the theiso-utility s*9 exchange with s is concaveanddecreasing. Hence,therateat which x(s) is increasing surplus in the is s. feasible at which to the rate Hence, region corresponds vc(s) decreasing is more than orequal totheloss in that a compensation theconsumers for represents thevendor's feasible their than duetousing services Similarly, optimal. higher utility The the frontier lies below incentive of this x(s) by given region offering vv(s*). shape as he or can is she curve ofthevendor's concave, x(s) as provide increasing iso-profit the After this vendor's until s*. is increasing hisorherownprofit begins point, profit of thevendor's function concavenature to decrease (recallthenonmonotonic profit The also decreases. oftransfer so theamount ins) inservices goodheorshecanoffer < Note level 3s : some service after transfer cannot offer vendor any good vv(s) vv(s*). than willnotchoosetooffer vendor that a rational s*,as theutility anyservice greater A the intersection this are ofboth Therefore, region point. beyond decreasing agents The for our setof agreement 2 is thefeasible in Figure bargaining problem. points as be written can then setofagreement feasible points
A = {(s, x(s)) : vc(s) + x(s) > vc(st*lvv(s)- x(s) > vv(sc*'s > se' x(s) > 0 } . (3)
theutility we now construct of thissubsection, As discussedin thebeginning = atthe tothetwoagents + 0,vv(s*) 0) is theutility d (yc(s*) pairs(0, d). The point theregion Within A, thesetof agreement corresponding points point. disagreement where the combined thevaluesof transfer to s = sBrepresents x(s) exchange good setto theutility thefeasible is maximized. planeof theconsumer Mapping surplus setrepresents the ofthesolution set0. The frontier we getthesolution andvendor, valuesofthetransfer levelsBandall feasible to service linecorresponding goodx(s). andconvex. set0 is compact from As we observe 2, oursolution Figure seeker the willprovide 4: In regulatory Lemma 3, themonopolist privacy regime = + which the + an incentive byx(sB) ((vJsB) vJsB)) (vjs*) vv(s*))/2for given = levelsB s* < s*. willagreetouse theservice seeker privacy itis optimal thevendor 1: Evenwhen seekers, for faces convenience Corollary somesB- s* > and he or shewilloffer contracts or hertoengageinprivate him 4. s*, and charge byx inLemma afee given See the Proof: Appendix.
210
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a The simple intuition extracts behind Lemma4 is that under 3, thevendor regime to the confrom and back some of the greater profit profit personalization, bygiving thevendor makes theconsumer off as well.The bargaining framework better sumer, theoptimal service wouldserveas theagreement levelthat helpsin deriving point andtheamount of incentive that thevendor has to provide to theprivacy seeker. By theproblem we were developing alongthelinesof an axiomatic bargaining setup, able toreduce ittotheequivalent ofdividing a fixed known as dividing pie,orbetter thedollarproblem loss ofgeneralizability, andin order to provide an [31]. Without tractable value for the we of assume that both our have incentives, analytically agents thesamepreferences overtheexchange Notethat thisassumption surplus. merely both that havethesameattitude toward risk. implies agents The problem can be divided intotwoparts: (1) to seekthelargest pie and (2) the decision on howto split it.In order for thebargaining to theconsumer process work, hastoagree toa private inaddition contract tohisorher useofpersonalization services as this is theonly canensure that theconsumer thepromised waythevendor provides information. Becausethe seeker cangethisorhersurplus-maximizing levelof privacy in services the absence of enforcement contract heor personalization capabilities, any sheagrees tohastoprovide him orhera higher Thebargaining solution tells us utility. that the ats*, representative ofthesocialwelfare maximization pieis maximized point has nowgoneup from to vv(jmD, he or 3). Becausethevendor's (Figure profit vx(s*) sheprovides of this excess to the seeker suchthat thenewutility is greater part privacy than notonlyarethetwoinvolved better off butbecausethe v.(s*).Therefore, parties service levelis sj, thewelfare is also maximized agreed-upon 4). (Figure While Amazon.com a broad of more services, provides range personalization recently italso introduced newwaysthrough which theconsumer is incentivized to provide more information than heorshewould inthe share course ofusing hisorher normally levelofpersonalization services. Onetype ofincentive thatAmazon.com optimal pro-
2 11
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andSocial 4. Producer andConsumer Welfare Figure Surplus itdiscounts theGoldBox program wherein from itscurrent videsis through products the to browse this list. Some of the consumers inventory attracting through offerings items butconsumers areaskedaboutproduct inthis listarenotindividual categories be interested. inwhich wouldmost Thus,eveniftheconsumer they likely eventually on hisorherpreferheorshehasprovided someinformation doesnotbuya product, thestore also incentivizes to fora sale. Further, consumers encesas he or shehunts to send their friends' andfamily members' e-mailaddresses with bypromising part information this is a of that a consumer is of related Clearly, piece products. coupons the level of if he or she used services. to personalization only optimal unlikely provide has evenbeenoffering to induce Amazon.com Morerecently, $0.05 to consumers abouttheir them to answer product preferences. simple questions when a regulator allowsprivate contracts in 2: Counter tointuition, Proposition and social are maxithe the market consumer, producer, welfare forinformation, when theregulator is allowed. when mized Alternatively, only usageenforcement or vice versa,at contracts in theabsenceofusage enforcement allowsprivate worseoff. is necessarily leastoneparty (vendor/consumer) See the Appendix. Proof: to directly do notallowvendors that evenwhenregulators Ourresults buy suggest thefirms can pursue a property to protect information consumer (in order privacy), andtothebenefit context ofpersonalization ofthe inthewell-defined rights approach to Coase's observation Ourapproach as wellas thesociety. consumers [11] converges areinitially andvaluations areknown, then that ifproperty assigned rights bargaining
2 12
is that the ofourresults willleadtoa socially efficient outcome. An important aspect from is evengreater than hisorhermaximum consumer that only utility gainsa utility to consumer for the incentive services. his or her Thus, using optimal personalization to the welfare the while also in is built maximizing participate bargaining naturally in, is also naturally in suchcontracts toparticipate The incentive for thevendor society. behavior. hisorhermonopoly ifhe orsheis unable toexercise present can alternatively the enforcement the allowance of technologies, regulator During Whiletheconsumers tothesociety. that canbe beneficial a form oftaxation consider and ofinformation for theuse ofservices, do notpaya "price" payin theform they Sucha tax ofthisinformation. taxthevendor's collection can possibly theregulator of inthe context tax[33] that is typically be equivalent tothePigovian would imposed in a tax the and where externalities there arenegative proportion pays polluter pollution taxleadstotheinternalization ThePigouvian ofgoodhe orsheproduces. totheunits cantheoInourcontext, the function. inthe ofexternalities regulator producer's profit > from the takes effect tax on the vendor that a point retically impose (V5 s*) where tax The totheconsumer. optimal theuse ofservices utility marginal givesa negative levelof thevendor's suchthat willbe designed profit-maximizing by theregulator as will be the same tax to be includes the function now service (where paid) profit will vendor on the and tax levelof service thewelfare-maximization (V), imposed the thetaxation: tobe noted There aretwopoints be given First, regarding by-v'c(s*). is paid theexcessprofit in thebargaining welfare is maximized butunlike context, as being beencriticized taxhas generally to thegovernment. Second,thePigovian know the charthat the it is as for theoptimal unrealistic; solution, required regulator more realistic andtheconsumers acteristics ofthevendor r).Itis perhaps (i.e.,a, ,/?, characteristics know eachother's topresume that vendors andconsumers (as required ofthesame. in thebargaining than theregulator's rather knowledge approach)
4 Regulatory Regime
allows private wherethe regulator regime4 describesthe situation Regulatory enforcement sort of contracts butdoes notallowthemonopolist to incorporate any theusageof a particular that can externally allowhimor herto ensure technology willnotensucha regime, themonopolist levelof service. It is apparent that under a in In the absence of an external seeker contracts. technology, gage privacy private theprivacy seeker might initially agreeto use s* > s* andcollecthisor herx(.) but continue to use his or hers* levelof services or perhaps evenmisrepresent might to willexpect theprivacy seeker information between s* <-s' Thusthemonopolist * * > inthecase ofconvenience s s use hisorhers *.However, because seekers, (i.e., thesetypes wantmoreservices thanwhatis offered), there is no needforexternal enforcement there is a guarantee ofusagebecausetheconsumer and,indeed, paysthe vendor for theprovision the results ofthe ofservices than s*. We summarize greater different in and to illustration Table 3 their numerical regimes along proceed provide with welfare next. implications
2 13
Different Table3. Results Under Regimes Regulatory No private contracts

No usage enforcement Regime 1 Vendor willoffer s* Consumers willchoose: Privacy seeker s* Convenience seeker sj Regime 2 Vendor willoffer s* Consumers willchoose: Privacyseeker s;} min{sc, Convenience seeker s*
Private contracts
Regime 4 Vendor willoffer s* Consumers willchoose: Privacy seeker s* Convenience seeker (s;,-x(s)) Regime 3 s* Vendor willoffer Consumers willchoose: Privacy seeker (s;, x(sj) Convenience seeker
Usage enforcement
Illustration Numerical
function we assumea simple Forouranalysis, g(s) = stechnology personalization andconsider a of information fora unit can be offered that is, at leastone service of is six that the ratio services number of whose is, profit-maximizing monopolist is 12.All consumers services tothecostofproviding information hisorhervaluefor their seekers where belowsix are privacy setof services with a utility-maximizing six set of services above a those with and e is ratio utility-maximizing p/r [0,12) p4p > the 5 shows is 12. ratio where their seekers areconvenience Figure optimal p/r p4p andmonopolist, for the consumer andprofits utilities levels andcorresponding service vendor willoffer the incentive Italsoillustrates (fee)that (charge) optimal respectively. 4. and 3 under seekers toprivacy seekers) (convenience regulatory regimes 4 has thesame under curve thewelfare 6 shows 1,2, and3 (regime regimes Figure for and regime 3 forconvenience seekers 1 forprivacy as regime welfare seekers) on theoretical with the ratios. Consistent presented arguments bargaining varying p4p from welfare dominates 3 atleastweakly under welfare we canseethat above, regime 1 and 2 whereno private whenwe compare However, regimes regime. anyother allowanceand disallowance choice is between existbuttheregulator's contracts ofthevendor's costcoefficient valuation therelative we see that of technology, () cost for concern consumer's of the and thecoefficient (r) comesintoplay. privacy is thesameinboth arethesame,thewelfare twocostcoefficients Whenthese cases; This 1 vice versa. and than is worse off 2 when > r,then however, regime regime in an better off is that intuition economic the illustration exchange, society supports level.In regime or service with lowercostschoosestheproduction whentheagent whilein regime themarket determine 2, thevendor regains 1, consumers offering, level. the market service determines and power monopoly
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Untilnow,we assumedthat werecomboththevendor and consumer parameters monknowledge. In theproperty as in regimes 3 and 4, to privacy rights approach bothagents wereawareofeach other's ifthere is no standard valuations. However, market valuefor a property andiftheowner's areprivate, then when two valuations overtheproperty, itis clearly intheinterest oftheowner toclaimthat parties bargain theproperty is more valuable to himorherthan itreally is. Similarly, ifconsumers' valuefor their is unknown tothevendor, thevendor property privacy maynotengage in private contracts as consumers arelikely to lie. Thus,eveniftheregulator allows forprivate thesocially desirable outcome discussed under 3 may contracts, regime notemerge. 3: Unlike traditional markets Proposition price-instrument forgoods with free a should market's the disposal, regulator encourage knowledge ofconsumers' itis theprivacy seekers whoare worseoff when p4p preferences. Interestingly, the p4p ratiois private information. See the Proof: Appendix. theconsumer off ifhisorherpreference is better information is private, Typically, thus a monopolist toonlyengagein secondorthird-degree discrimiallowing price nation. wouldhave amounted to zero consumer First-degree pricediscrimination This intuition thatprivacy-seeking able to surplus. might suggest typesare better themselves their true concerns. On the our protect byhiding privacy contrary, results that theregulator shouldencourage revelation of privacy The suggest preferences. basisfor theprivate contract with theprivacy is thepossibility seekers thevendor that
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2 16
CHELLAPPA AND SHI VENDU
can incentivize theprivacy to use moreservices than he or shewouldideally seeker is arrived at bythevendor's liketo use. However, theagreed-upon setofservices sB then assessment of theprivacy seeker's loss. If thep4p ratiois private information, value.Fromournuhis or hertrue theprivacy seeker willclaima lowerratio than is increasing of incentives merical in Figure7, we can see theamount illustration 3 is always withdecreasing theservicelevelunder regime p4p values.Similarly, Because themarginal seeker. thanthepreferred levelfortheprivacy utility higher will consumer the the the is from and that from transfer same, good personalization thenewp4p ratiois levelfrom declarea p4p (p/r)suchthat thebargained service - that = sc% andthus level thesameas theconsumer's true is,s~B surplus-maximizing wouldhaveanyway seeker derives a netutility ofvc(s*)+ x(i^ ). Becausetheprivacy Thusitis worseoff. is nowclearly consumed s* without thevendor anyincentives, she does not whenhe or forthevendor contract notoptimal to engagein a private that of Coase's theorem knowtheprivacy seeker's valuation. Our findings parallel when outcome not lead to efficient also stresses that thebargaining [11],which may are well defined. valuations areprivate eveniftheproperty rights onewould ofprivacy the lines ofP3 andsimilar tothe behavior seekers, expect Along suchthat a higher declare theconvenience seekers also to lie andpossibly p4pratio in theasymmetry unlike thevendor wouldoffer more services than before. However, not does the information in our a typical context, asymmetry principal-agent setup, is that thisproposition The intuition behind bestowanyadvantage to theagent. by his or than her the vendor to services that are asking higher profit-maximizing provide lossin theconvenience seeker tonotonly for thevendor's level, compensate promises seeker butalso share with thevendor. Iftheconvenience theremaining profit surplus declares a p4pratio than he orshewouldindeed hisorhertrue value,then get higher more or she would also services than thefull-information but he solution, bargaining haveto paya higher feeto thevendor. iftheconvenience seeker declares Similarly, a p4p valuethat is lower than hisorhertrue evenifthefeeto be paidis value,then levelwouldalso be further hisorher service less,theresulting awayfrom bargained ideal point. At thefullinformation service levelunder the 3, regime gain marginal to theconsumer from more services loss tothevendor (than s*) equalsthemarginal from services than hisorherprofit-maximizing level.Fora declared offering greater than thetrue to the consumer is less than value,themarginal p4p ratiohigher gain themarginal loss to thevendor and hencetheconsumer cannot after gainanything thevendor's loss. Fora declared thetrue value, compensating p4p ratiolowerthan themarginal is higher than themarginal loss to thevendor and gaintotheconsumer therefore theconsumer cancompensate thevendor for loss and still have an extra any to share. Thisgaintotheconsumer until continues thepoint described surplus bythe fullinformation where itequalsthemarginal loss tothevendor. solution, The implication oftheaboveanalyses is that evenwhenthep4pratio is notcommonknowledge, theregulator must allowfor thevendor andconsumers toengagein a private contract. Whilethevendor andthemarket condition willdetermine whether ornotsucha contract willbe pursued, thewelfare to society with theprovision ofa contract is alwaysgreater than or equal to thesocialwelfare that reliesonly private
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enforcement abilities. on thevendor's of Indeed,we can observethattheresults 4 will be similar to that of where information the vendor asymmetry regime designs forconvenience seekers whileprivacy seekers use their contracts respective private service level. surplus-maximizing
andFuture Research Discussions, Limitations,

regirre choices faces inthe for es four that a regulator market inforchevaluat Ourresear the oftechnologies that beconsidered describe mation. These (dis)allowance regimes may of"buying" information. Wemodel these choices intrusive as wellas the (dis)allowance for market a service a defined two consumer offering by byexamining monopolist's - privacy the andconvenience seekers. interaction between Byinvestigating strategic types andderiving the service we areableto andthe consumers optimal monopolist offerings, andsocialwelfare under eachregime. consumer theprofits, surplus, compare trade-off ofthepersonalization-privacy thenonmonoOurformalization through theno-free-disposal nature of the service.The underlines tonicconcaveutilities withits"more-is-not-necessarilycombined "free-of-charge" aspectof thisservice with certain that the endowsconsumers character better" uniqueabilities challenge markets. Whilea commonsense wisdom of monopoly conventional approach might ofinformation toward the the needfor prevention acquisition, strong regulation suggest somerecommendations inthis market be we show that formal may modeling, through where contracts are not and the cases counter tointuition. feasible, private Considering under themonopolist is able 1 and2, we see that 2, when regime regimes comparing andforces some toenforce services usage,he orshegainsbackhismonopoly power from to have zero a consumer's of a should Thus, surplus. point view, regulator types ifno private disallow theuse ofenforcement contracts areoffered. technologies
2 18
On the arefeasible suchas inregimes other we see that when contracts hand, private in regime no worse than whois worseoff 3 and4, itis theprivacy seeker (although situation Thisinteresting arenotallowed. enforcement 1) when emerges technologies with seekers that vendors willnotseekto engagetheprivacy due to thefact private which the manner unlessthey can be sureofa tangible contracts agreement through allowenforcement should theregulator that canbe enforced. Thusourresults suggest focus ofa regulator Insummary, the onprivate contracts. conditional only technologies and information over theconsumers on their should be in educating rights property ofthevendor. on thepart ensure that contracts arehonored wheresome researchers on privacy in earlyreports finds Our approach support It has beenaskedof the to information. haveadvocated a property rights approach can haveas where individuals we in as "how can live a information to society age benefits ofusing economic where the and much information as want, yet privacy they that areoptimized?" information in commerce [22]. Thisreport suggested personal in socialchoice of"poor because inprivacy-related markets hasoccurred market failure exercise formal In absence of the theallocation ofproperty [22]. modeling any rights" thenecessary ourresearch to this or lendscredibility that examines theory, provides inthe ofproperty ofallocation effect thesocialwelfare framework toexamine rights advancements. and ofonline context privacy technological
Managerial Insights
andmining related totheacquisition firms areinvesting intechnologies Manyonline Overture Yahoo information. ofconsumers' and acquired Recently, preference personal "contextual which is well-known for its Services, (seewww.overture.com). advertising" customer that Yahooacquires The natural between thetwois dueto thefact synergy user toconstruct information canmine this customer information andOverture profiles that of services different sets Yahoo offers andplace targeted advertisements. many use onlya subset butmost consumers a consumer inmy.yahoo.com, can personalize IfYahoo's information of theseservices andhenceprovide onlyforthoseservices. its itcouldrequire of information, modelis builtaround a certain amount business at least should that all users toconsume it could users that level;for example, require Sucha strategy their andhoroscope. information for stock weather, provide portfolio, itoptimal find all of itsconsumers on thepart ofYahoocan be viableonlyifeither to ensure or ifYahoohadtheability forthesethree services to provide information that consumers willindeeduse theseservices. WhileYahoocan use account expirathe itsconsumers touse a certain levelofservices, tionandother toforce techniques ofcompetitors theviability ofthisstrategy. abundance challenges which he orshe Ourresults a vendor should find innovative waysthrough suggest use ofpersonalization can provide consumers with arerelated totheir incentives that andthey Firms suchas Amazon.com inthisstrategy services. areexemplars provide not that are normally various forms of incentives to theconsumers to use services to vendors is within their most form used level. The common prooptimal bymany of a series videcoupons that e-mail aresent andconsumers through navigate through
219
them. Butother suchas a "GoldBox" scheme, arealso clickstoredeem techniques, a store in prescribed order to avail of theuserto browse used that through require customers toprovide their e-mail addresses Firms alsoentice discounts. friends/family to their on on the of discounts friends similar price promise providing during shipping 1 a scheme where an instant reward of .57 now has new Amazon.com items. percent after is provided (calledn/2% adequate usageofitsA9.com byAmazon)ofpurchases services. Similar toourdiscussion andbrowsing search information) (which acquires - Sponsored "How can we afford this? Amazon.com 3 and under states, 4, regimes search ads on A9.comandAmazon.com thesmalltext-based linksrevenue from - willhelpoffset theInstant Reward costswe incur results promotion. through pages with we areeffectively n/2%Instant With ourautomatic Reward, sharing yousome the i.e. from we collect the of links, sharing pi" (www.amazon. sponsored money com/gp/sx/sharethepl.html). inmechanisms to learn about vendors should invest that also suggest Ouranalyses While of to the success as it is consumer strategies. personalization key parameters andprivacy on measuring research academic little is relatively there personalization on these some research recent measuring provides guidance empirical relationships, individual [8]. parameters specific 3 is dependent thesuccessof thesociallyoptimal Furthermore, uponthe regime orthevendor violate the iftheconsumers oftheprivate execution truthful contract; Froman implementation willbe worseoff. thesociety then oftheir terms contract, with thevendor canbe facilitated choicesandbargaining theconsumer's perspective, for as the such preferences platform privacy protocols modifying privacy bysuitably as the is very frameworks forsuchbargaining The potential high, (P3P) framework. is still in information use of consumer and of range personalization potential possible of and biometrie fields the true with This is itsinfancy. genetic emerging particularly butalso the for is notonlythepotential there where drugs personalized technology, violations of serious [45]. privacy possibility
Research andFuture Limitations

we develop ofprivacy inthepresence ofpersonalization model As thefirst concerns, it For future consumer and a with vendor ouranalysis research, types. representative ofconsumer a distribution vendor toexplore be interesting would assuming strategies a a we context; Further, mayshed analysis duopolistic monopolistic explore types. able to better be and we this market in on thecompetitive morelight may aspects of a the service vis--vis Yahoo such as of a portal offerings analyzethestrategy suchas MSN. competitor References S. Interac1.Alba, Wood, A.;and R.;Sawyer, C; Lutz, Weitz, B.;Janiszewski, J.; J.; Lynch, inelectronic toparticipate incentives manufacturer and home tive Consumer, retailer, shopping: 38-53. Journal 61,3 (1997), ofMarketing, marketplaces. with electronic R.K.Quasi-naturally 2. Barua, A.,andChellappa, occurring expenments
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markets anddigital InC. Holsapple, V.Jacob, andH.R.Rao (eds.),Business Modeling: products. - Economics, andInformation Multidisciplinar)/ Systems Perspectives. Approaches Operational Boston:Kluwer 2002,pp. 293-307. Academic, wave. HarvardBusinessReview, 3. Bessen,J. Ridingthemarketing information 71, 5 (1993), 150-160. 4. Bloom, R. Avoiding misuse ofnewinformation G.R.;andAdler, P.N.;Milne, technologies: considerations. Journal 58, 1 (1994),98-1 10. Legal andsocietal ofMarketing, - Will ForceUs toChooseBetween D. TheTransparent 5. Brin, Privacy Technology Society and Freedom? MA: Perseus Books,1998. Reading, K.R. Examining theroleof "free" 6. Chellappa, R.K., and Kumar, product-augmenting Journal online services inpricing andcustomer retention InformaofManagement strategies. tion 22, 1 (Summer Systems, 2005), 355-377. for andsampling S. Managing 7. Chellappa, R.K.,andShivendu, strategies Pricing piracy: markets. Research, 16, Systems Information segmented digital experience goodsin vertically 4 (2005),400-417. An empirical examination versus 8. Chellappa, R.K., andSin,R. Personalization privacy: and Management, oftheonlineconsumer's dilemma. 6, 2-3 (2005), Technology Information 181-202. andconsumer ofonline callfor FTC investigation 9. Chester, J.Consumer advertising groups Press for andtargeting Center Release, DC, Washington, Democracy tracking practices. Digital November 1,2006. in the information alternative M.E. Evaluating 10. Clemons, E.K., and Thatcher, regimes information. Journal thesocialcostofprivate health insurance of Managing industry: private 14,2 (Fall 1997),9-32. Management Information Systems, 1 (October 11. Coase,R. Theproblem ofsocialcost.Journal 1960), ofLaw andEconomics, 1^4. and 12.Culnan, andArmstrong, RK. Information fairness, concerns, M.J., procedural privacy An empirical trust: Science,10, 1 (1999), 104-115. impersonal investigation. Organization andjusticeconsideconomic andBies,R.J. Consumer 13.Culnan, M.J., Balancing privacy: erations. Journal ofSocial Issues,59, 2 (2003), 104-115. 14. Derlega, S. Self-Disclosure. Park, V.; Metts, S.; Petronio, S.; and Margulis, Newbury CA: Sage, 1993. oftrust inbuyer-seller rela15.Doney, An examination ofthenature J.P. P.M.,andCannon, Journal 61, 2 (April1997),35-51. ofMarketing, tionships. V.A.(eds.). Private LivesandPublicPolicies: 16.Duncan, G.T.;Jabine, T.B.; andDe Wolf, andAccessibility DC: National Statistics. Academy Confidentiality ofGovernment Washington, Press,1993. of 17.Glazer, inan information-intensive S. Marketing environment: implications Strategic as an asset.Journal 55, 4 (1991), 1-19. knowledge ofMarketing, 18. HIPPAprivacy ruletakes effect. Healthcare Financial 55, 6 (2001),9. Management, 19.Hoffman, M. Building consumer trust online. CommunicaD.L.; Novak, T.P.;andPeralta, tions ACM,42, 4 (1999), 80-85. ofthe 20. Hoofnagle, Electronic C.J.Privacy selfregulation: A decadeofdisappointment. Privacy Information Center, DC, March4, 2005 (available at www.epic.org/reports/ Washington, decadedisappoint.html). 21. Kwak,M. Websiteslearn tomakesmarter MIT SloanManagement Review, suggestions. 42, 4(2001), 17. 22. Laudon,K.C. Extensions ofpricing intothetheory ofmarkets andprivacy: Mechanics formation. InW.M.DaleyandL. Irving andSelf-Regulation intheInformation (eds.),Privacy DC: U.S. Department ofCommerce, June1997(availableat www.ntia.doc Age.Washington, 1D). 1.htm# .gov/reports/privacy/selfreg 23. Laufer, M. Privacy as a concept anda socialissue:A multidimensional R.S., andWolfe, Social Issues,33, 3 (1977), 22-24. developmental theory. 24. Lemos,R. Analysts: cost millions. ZDNet News,January 9, 2001 Egghead'sinquiry (availableat http://news.zdnet.com/2100-9595 22-527001.html). 25. Liang,T.-P.;Lai, H.-J.;and Ku,Y.-C. Personalized content recommendation and user satisfaction: Theoretical andempirical Journal synthesis Information findings. ofManagement 23, 3 (Winter 2006-7),45-70. Systems,
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52. Winer, R.S. A framework for customer California Management management. relationship Review, 43, 4 (2001), 89-105.
Appendix ofLemma1 Proof

= ag(s) - s2and vc(s)=ps- rg's). s* is thesolution totheequation We havevv(s) - that = convex and Because is 0 is,g(s*)g'(s*) -pllr. g and increasing, g strictly vc' = inplr.vc(s) ps^ rg's)= in s andhences* is increasing g' arebothincreasing = g2(s).Differentiating to (w.r.t.) bothsideswith 0 => (plr)s plr,we get respect
> 0. Because sc> s* and 2g(sc*)g'(sc*) >p/r. Hence 5sc/8(p/r) =p/r, 2g(sc)gf(sc)
Proof ofLemma2
s* > s*. theconvenience for theprivacy s* < s*, andfor seeker, seeker, By definition, constraint In thepresence ofenforcement onlyconsumers' participation capabilities, the consumers needstobe satisfied, whereas intheabsenceofenforcement abilities, In thepresoffered can use anyservice levelequal to or belowthat by thevendor. willoffer thevendor ifvc(s*)> 0, then enceofenforcement, for theprivacy seeker, tohisor levelclosest ifvc(s*)< 0, then thevendor willoffer theservice s*; however, constraint seeker's hersurplus-maximizing such that the level, participation privacy - thatis, theprivacy is is met Because thevendor's seeker profit getszero utility. = 0. For will offer where at service levelsless than he or she increasing st, vc0c) sj' willoffer s*. theconvenience > 0, hencethevendor seeker, vc(s*)> 0 andv'c(s*) in will s* to the convenience the of the vendor offer absence Also, enforcement, seeker as heorshewillfind levelirrespective ofexternal itoptimal touse this service ifthevendor enforcement. theprivacy will use s* < min{sc,s*}y seeker However, offers willoffer Hencethevendor onlys*. min{5c,5*}.
ofProposition 1 Proof
> sj forconvenience < 0 foranys > seekers. Because (5vv(s*))/8s By definition, sc* the vendor will the choose s* of the to enforce. However, only irrespective ability sv' effect ofenforcement (whens* is chosen)andnonenforcement (whens* is chosen) on thewelfare ofthesociety becomes when themarket has someprivacy ambiguous - that seekers than or vice versa. Letus assume is,vjis*) is notalways greater vw(s*) that fora givensetof vendor and a coefficient (r), (a, ) parameters givenprivacy
223
= vw(s*). We needto provethat for is someconsumer there typeforwhomvw(s*) forwhomtheequality does there areother consumer thesegiven types parameters, of therightvalueof r andchanging valuesofp, thedirection nothold.Fora fixed - that = s*- is constant andpositive. thedirection handside However, is,6vH(s*)/dp sideis ambiguous. oftheleft-hand
andbecause2rg'(s*)g(s)= p, we have
-^
if is positive (6vw(s*))/8p
sc+^(ag'(sc)-2fisc).
,-(,)-*;
if is negative and8vw(s*)/8p
-|^
*:<|KW-*:)Hencewe have(a) oftheproposition. consumer's consumer tousethe the canforce thevendor somemechanism Ifthrough will the vendor then service levelorthevendor's break-even level, willingly optimal - that whereas willprefer in sucha mechanism invest is,thevendor vv(min{ jc, jv*}), thecost willgetonlyvv(s*). thevendor willprefer theconsumer However, s*, where the seeker in makes the vendor so hastobe lessthan ofdoing forcing privacy anygain level.Hencewe havePl(b). newservice to movetothis
ofLemma3 Proof
is that he or shecan do better willengagein bargaining that thevendor The reason will The consumer at her current his or than agreeto sucha bargaining profit vv(s*). does better. andpossibly than at vc(sc*), Hence, onlywhenhe or sheis notworseoff her excess that his or level such service a is to offer thevendor's profit problem _ the maximized after is level new service the from v compensating (s *) (v (5) (sB) on is also the consumer loss to As the loss (v (s*) v(s)). consumer's dependent thisloss in hisorhermaximization has to include thenewservice level,thevendor Lemma 3. have we hence problem;
224
1 Proof ofLemma4 andCorollary

andtheprivacy both thevendor where We develop an axiomatic bargaining problem from overv.,i = { v,c} as theutility seeker havethesamepreferences personalization and aretransferable for thevendor from tothe consumer andtheprofit personalization Forsuch Hence(0, d) is a symmetric haveone-to-one problem. bargaining equivalence. and PAR conditions from is SYM the Nash solution obtained [31]. directly problems, where at the will be obtained efficient The uniquesymmetric point utility, profit pair Becauseall ofBn(sB) inequalparts. andtheconsumer divide thepieBn(sB) thevendor of incentive a total he orshewilloffer is initially madeavailable tothevendor,
( A_vc(Jg) 1'SB)+ vv(Jn)-Vc(Jc)-Vv(Jc) -
to theprivacy seekers. totheproblem is determined posedinLemma3. Differentiating bythesolution sB with to we s, get respect Bn 8s s 6s
welfareorder ofthe other than the first as vc(s*) andvv(s*) areconstant. Thisis nothing = levelfrom + vc(.).Hencetheservice ofvw(.) vv(.) maximization bargaining problem levelsB= sh*. is equal tothewelfare-maximizing service in that the seeker's of theprivacy The convenience seeker's case is theconverse In level. the barmore than the vendor's convenience seeker services optimal prefers for cost vendor the willnot the seeker the convenience only compensate gaining setup, seeker but the convenience ofoffering inexcessofthevendor's level services optimal willalso payan additional that is proportional tothegaininhisorherutility. charge as well,we wouldgetx as the If we applythebargaining framework to thisregime 1. willbe willing that thevendor to accept.Hencewe haveCorollary optimal price
Proof 2 ofProposition
and In theabsenceof enforcement, thevendor's is v,(>*);withenforcement profit contracts from is 3), netprofit private (regime personalization i v , v + , v vsb) vv{sb)-vc(s*c)-vv(s*c)
We know that > 0 andvv(sB) > vv(s*), + vv(s*) > 2vv(s*). This so vv(sB) vc(s*) vc(sB) > durand hence the is implies welfare higher producer always vv(sB) %(sB) vv(s*), 3. and Under the seeker would have received 1, ingregime regime privacy v.(5r*), in he or + > she receives Because 3, (theprivacy regime vc(sB) x(sB). x(sB) vc(s*) vt{sB)
225
+ x(sB)> vc(s*).Hence for hisorherloss),we havevc(sB) seeker being compensated 3. Thus,we see theagreedbetter off is also always seeker the during regime privacy = > 3 > regime hence from Lemma level s* service 4, upon vJ^sB) vj^s*) (regime sB allowed > If contracts are and > 3 and 2). only 1) private vj^s*)(regime regime vM,(s) willonly seeker that the is not(regime enforcement 4), weknow getv{s*) and privacy - so both andthevendor areworse theprivacy seeker willonlygetvv(s*) thevendor convenience seeker and between the The contracts to their with off exchange. regard and 4. 3 willbe thesamebetween thevendor regimes
3 ofProposition Proof
distribution Let thep4p ratio(plr) be givenby some8 e [6,0], witha cumulative a and function parameters F(0) anda density /(0) > 0 on [0,0]. Let thevendor's oftheconsumer's andhe or sheknows be common onlythedistribution knowledge thevendor wouldpaya net in private of engaging In theevent contracts, p4p ratio. of transfer *(0) =
,,
(v,(^(e))-vv(,;(e)))+(vc(,;(e))-vc(^(e)))
2
tobe some = hisorherp4pratio announces totheconsumer. Now,iftheconsumer willbe received thetransfer 0 A0,then
x(0)
,a= MM)KM^('.(*()H(-.())) .
< 0 and solution at thebargaining Fortheprivacy seekers, point sB,dvv(sB(Q))/ds is solution the new then of announces 0 < a consumer If 0. , bargaining dx(Q)/ds his or her will lower consumer to the is the value < Because up s*, vc increasing sB sB. = with smaller toincrease transfer While the s*. so that goodx continues p4pratio sB onfrom this todecrease belowsB= s*, vf valuesof6 , lying and,hence, point begins loss the trade-off between on the will a lower to declare decision ward, depend any will seeker theprivacy andgaininthetransfer inconsumer good.Therefore, surplus = levelsB s*. service thebargained suchthat alwayslie at leastup to a p4pratio level contract a service will never the consumer of thevendor's From view, point consumer level that the service this is the without Even than s*. bargaining, greater wouldnothavehad to payanytransfer andthevendor wouldhavechosen, good as contracts willnever cantakeplace,thevendor well.Hence,iflying engageinprivate is paying a feefor seeker becausetheconvenience seeker. theprivacy with However, as thefee and vendor's the above are that provided level, services profit-maximizing consumer in thep4p ratio, the in s and as sBis increasing > s* is increasing x(sB)'sB thanhis or hertruevalue. a p4p ratiohigher offby declaring be better will never would thefeetheconsumer then a lower declares consumer ifthe p4pratio, Similarly, from his level that is farther needto payis less buthe or she willalso geta service level. orheroptimal

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An Economic Model of Privacy: A Property Rights Approach to Regulatory Choices for Online Personalization Author(s): Ramnath K.

An EconomicModel ofPrivacy: A Property Rights Approachto ChoicesforOnline Regulatory Personalization

CHELLAPPA AND SHIVENDU

AN ECONOMIC MODEL OF PRIVACY

CHELLAPPA AND SHIVENDU

AN ECONOMIC MODEL OF PRIVACY

andPrivacy Information for The Market

CHELLAPPA AND SHIVENDU

AN ECONOMIC MODEL OF PRIVACY

CHELLAPPA AND SHIVENDU

AN ECONOMIC MODEL OF PRIVACY

Problem The Regulator's

CHELLAPPA AND SHIVENDU

Table 1. Regulatory Choices Allowance of

Private contractual agreements

andMonopolist Regulatory Regimes Strategies

AN ECONOMIC MODEL OF PRIVACY

Table2. Objective Functions andStrategy Space space Strategy

regime Regulatory g {R1, R2, R3, R4}

CHELLAPPA AND SHIVENDU

Services (5) Personalization

Functions oftheTwoConsumer Function oftheVendor andUtility Types Figure1. Profit

Regulator chooses regime

Vendor observes and regime consumer characteristics

Vendor determines serviceset tobe offered

Consumer chooses serviceset he or she will consume

Personaland preference information for exchanged personalized services

AN ECONOMIC MODEL OF PRIVACY

CHELLAPPA AND SHIVENDU

AN ECONOMIC MODEL OF PRIVACY

CHELLAPPA AND SHIVENDU

AN ECONOMIC MODEL OF PRIVACY

CHELLAPPA AND SHIVENDU

M'. v^ V 1 ' iCurVe

AN ECONOMIC MODEL OF PRIVACY

A = vw(sB) B = vw(sl) C = vw(sl)

CHELLAPPA AND SHIVENDU

AN ECONOMIC MODEL OF PRIVACY

Different Table3. Results Under Regimes Regulatory No private contracts

CHELLAPPA AND SHIVENDU

5. Utility from for Personalization Different ServiceOfferings Figure

Effect ofInformation on Regulatory Choices Asymmetry

AN ECONOMIC MODEL OF PRIVACY

Regime 1 Vendor Parameters

(C) 6. Welfare Effect Under Different Frameworks Figure Regulatory

CHELLAPPA AND SHI VENDU

AN ECONOMIC MODEL OF PRIVACY

9Q Incentivesfor 0 declared p4p

Declared p4p 23456789

andFuture Research Discussions, Limitations,

CHELLAPPA AND SHIVENDU

AN ECONOMIC MODEL OF PRIVACY

Research andFuture Limitations

CHELLAPPA AND SHIVENDU

AN ECONOMIC MODEL OF PRIVACY

CHELLAPPA AND SHIVENDU

Appendix ofLemma1 Proof

AN ECONOMIC MODEL OF PRIVACY

CHELLAPPA AND SHIVENDU

1 Proof ofLemma4 andCorollary

AN ECONOMIC MODEL OF PRIVACY

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