Caviar and Yachts: How Your Purchase Data May Come Back to Haunt You

A new generation of technologies allows firms to track online consumer behavior with increasing granularity, and to share this information with other firms. This promise of information sharing has driven considerable interest from firms; and its potential for monetization has allowed a large number of online and web services to be available free of charge to consumers (in exchange for behavioral tracking). At the same time, information sharing is not without risks, according to a variety of consumer advocates. We examine these risks and benefits using a game-theoretic model of information sharing. Online consumers decide whether to buy a product from two firms in sequence. Depending on the regulatory regime, the first firm may be allowed to sell its purchase information to the second firm. Unlike previous studies, our model employs a continuum of consumer types, revealing effects that have not been highlighted previously. Market outcomes depend critically on whether consumers are myopic, considering each purchase in isolation, or fully rational, considering the effect a purchase will have on future price discrimination. Myopic consumers always lose utility when firms are allowed to share information, though total welfare increases. On the other hand, fully rational consumers behave in a way that drastically limits firms’ abilities to price discriminate. As a result, both consumer surplus and overall welfare are higher when firms are allowed to share information. Surprisingly, firms actually earn less profit than they would if information sharing were forbidden, as long as consumers are fully rational. The fact that firms do not often offer strong privacy guarantees provides some evidence that many of today’s consumers are myopic.