Who Benefits from Online Privacy?
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When firms can identify their past customers, they may use information about purchase histories in order to price discriminate. We present a model with a monopolist and a continuum of heterogeneous consumers, where consumers can opt out from being identified, possibly at a cost. We find that when consumers can costlessly opt out, they all individually choose privacy, which results in the highest profit for the monopolist. In fact, all consumers are better off when opting out is costly. When valuations are uniformly distributed, social surplus is non-monotonic in the cost of opting out and is highest when opting out is prohibitively costly. We introduce the notion of a privacy gatekeeper - a third party that is able to act as a privacy conduit and set the cost of opting out. We prove that the privacy gatekeeper only charges the firm in equilibrium, making privacy costless to consumers.
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Kimberly J. Jenkins Distinguished University Professor of New Technologies
Professor of Economics
Taylor's primary research interest is microeconomic theory with emphasis on the areas of Industrial Organization, Political Economy, and the Theory of Contracts. He has worked on a variety of topics such as: the optimal design of research contests, the causes and timing of market crashes, and consumer privacy. Professor Taylor's research has been supported by grants from the National Science Foundation, the U.S. Department of Agriculture, and the Texas Higher Education Coordinating Board, am
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