Incentive Design for Free But No Free Disposal Services: The Case of Personalization under Privacy Concerns

Personalization under Privacy Concerns Ramnath K. Chellappa* [email protected] Shivendu Shivendu [email protected] * 1300 Clifton Road, Goizueta Business School, Emory University Atlanta, GA 30322-2710 Abstract Online personalization services belong to a class of economic goods with “no-freedisposal” (NFD) property, where due to privacy concerns more services is not always preferred to less. Therefore, even if these services are offered for free, online vendors find only a subset of services being used and thus acquire a reduced amount of preference and usage information. Vendors have invested in sophisticated technologies such as browser-embedded toolbars to have greater control in designing mechanisms for consumers’ usage of these services. This paper analyzes a monopolist’s optimal contract designs for personalization services under information asymmetry in a market where consumers are heterogeneous in their concern for privacy. Our analyses reveal several interesting results some of which are counter to those observed in other information goods market with zero marginal cost. Not surprisingly, under full information the vendor strictly prefers a variable to fixed contract as he can discriminate in the former and finds that under certain condition providing coupons or incentives with usage to be profit improving. However when considering services-only contracts under asymmetry, a fixed contract is optimal under certain conditions and surprisingly for some markets, a consumer-welfare maximizing contract emerges to be superior for the monopolist. An interesting aspect of the fixed contract is that when the vendor engages in couponing he continues to serve the same proportion of consumers as in the services-only case, even if consumer welfare, producer surplus and social welfare are all higher with incentives. We show that a purely usage-based contract is suboptimal even when marginal costs are zero, as the monotonicity constraints on incentives become binding. As a result we develop a bunched solution that is weakly superior to all other contracts; interestingly our results shows that an optimal truth revealing contract requires more incentives need to be paid to consumers that value personalization over privacy than the intuitive view that couponing is effective as a tool to bring in privacy-seekers to participate in the market.