Consumer profiling with data requirements: structure and policy implications
File(s)
Accepted version
Author(s)
Valletti, Tommaso
Wu, Jiahua
Type
Journal Article
Abstract
We consider a model where a monopolist can profile consumers in order to price discriminate among them, and consumers can take costly actions to protect their identities and make the profiling technology less effective. A novel aspect of the model consists in the profiling technology: the signal that the monopolist gets about a consumer’s willingness‐to‐pay can be made more accurate either by having more consumers revealing their identities, or by spending larger amounts of money (e.g., on third‐party complementary data or data analytics capabilities). We show that both consumer surplus and social welfare are convex in the ability of consumers to conceal their identities. The interest of this result stems from the fact that consumers’ concealing cost can be interpreted as a policy tool: a stricter privacy law would make the concealing cost lower, and vice‐versa. Consequently, a policymaker who promotes total welfare should either make data protection very easy or very costly. The right direction of data regulations depends on data requirements. In particular, a higher (lower) data requirement is an instance when more (less) consumers are needed to achieve the same signal precision. We show that a strict data privacy law is preferable under a high data requirement so that firms are less likely to invest in profiling inefficiently, whereas there is less concern with little or no data regulations under a low data requirement. We also discuss when greater data protection may be beneficial to the firm.
Date Issued
2020-02-11
Date Acceptance
2019-08-01
Citation
Production and Operations Management, 2020, 29 (2), pp.309-329
ISSN
1059-1478
Publisher
Wiley
Start Page
309
End Page
329
Journal / Book Title
Production and Operations Management
Volume
29
Issue
2
Identifier
https://onlinelibrary.wiley.com/doi/full/10.1111/poms.13108
Subjects
Science & Technology
Technology
Engineering, Manufacturing
Operations Research & Management Science
Engineering
profiling
privacy
price discrimination
signal accuracy
big data
PRICE-DISCRIMINATION
PRIVACY
MARKETS
COMPETITION
ECONOMICS
Operations Research
0102 Applied Mathematics
1503 Business and Management
Publication Status
Published
Date Publish Online
2019-09-22