A Model of Portal Competition in the Presence of Privacy Concerns: Strategic and Welfare Implications

The revenue model of online portals is based on access to consumers and their preference information through offerings of “free” personalized services. Extant research has characterized consumer behavior in this context by a personalization for privacy (p4p) ratio, which represents consumer’s tradeoff between value for personalized services and nonmonetary privacy costs incurred in sharing their preference information. In determining the optimal level of services, two factors affect a portal’s personalization strategy: its marginal value for preference information (MVI) and its ability to enforce consumers’ usage of services. Counter to intuition, our results show that a monopolist is indifferent to enforcement abilities, even if social welfare is strictly higher in the absence of enforcement. Our duopoly model reveals that when portals do not enforce services usage, a symmetric equilibrium exists if and only if the MVI of both portals is high and no equilibrium is found otherwise. On the other hand, when portals enforce services usage there are two possible outcomes: (1) an asymmetric equilibrium exists if one portal has high marginal value for information and the other has sufficiently lesser MVI, and (2) a symmetric equilibrium exists if and only if both portals have high MVI. We discuss our results in light of portals’ usage enforcement and from the perspective of a regulator who is interested in social welfare in the presence of privacy concerns.