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Duke Economics Working Paper #02-02

Private Demands and Demands for Privacy: Dynamic Pricing and the Market for Customer Information


Curtis R. Taylor

Abstract

Consumer privacy and the market for customer information in electronic retailing are investigated. The value of customer information derives from the ability of firms to identify individual consumers and charge them personalized prices. Two settings are studied, an anonymity regime in which sale of customer information is not possible, and a recognition regime in which a firm may compile and sell a customer list. Welfare comparisons depend critically on whether consumers anticipate sale of the list. If consumers do not foresee sale of their data, then firms possess incentives to charge higher prices under the recognition regime because this enhances the value of the list. If consumers anticipate sale of the list, then some types engage in strategic demand reduction. This undermines the market for customer information and often results in lower prices than would prevail under the anonymity regime. Firms prefer the recognition regime when consumers are myopic and the anonymity regime when consumers are strategic. More generally, welfare comparisons depend critically on demand elasticity.

Key Words: Privacy, Customer Information, Internet, e-commerce.

JEL: C73, D81, D82

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34 pages

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