Consumer Profiles, Consumer Privacy, and the Information Marketplace

Duke University, Durham NC

Investigators

Abstract

In a recent survey, the Federal Trade Commission (FTC) found that 99% of on-line companies collect personal information from the individuals visiting their web sights. In September 2000, Amazon.com conducted dynamic pricing experiments in which DVD movies were sold to different customers at different prices (up to a 40% difference) based on their purchasing histories. Besides dynamic pricing, firms use consumer profile data to target ads and make product recommendations. Indeed, customized ads that use consumer profile data sell for up to ten times the price of untargeted advertisements. There are many Internet marketing firms such as Double Click and I-Behavior that collect and sell customer information to electronic retailers. In addition to purchasing histories, these databases typically contain such items as an individual's income, size of family, lifestyle interests, and motor vehicle ownership. Consumers are becoming increasingly aware that their electronic purchases and other activities are being monitored and cataloged. The purpose of this project is to investigate these privacy issues in the context of a series of game-theoretic models. Specifically, some of the key questions to be addressed include the following: What is the economic impact of a closed privacy regime (in which consumers own the information) versus an open privacy regime (in which firms own it)? Which -- if any -- consumers are likely to benefit from an open privacy regime and which are likely to be hurt by it? When -- if ever -- would firms prefer to insure the privacy of their customers and how might they accomplish this? What is the impact on efficiency and industrial organization of access to consumer profile data? Specifically, will such data become an integral input to the profitability of firms, and if so, is differential access to information likely to generate market power and anti-competitive behavior?