Competing with Privacy

We analyze the implications of consumer privacy for competition in the marketplace. We consider a market where rms set prices and disclosure levels for consumer information and consumers observe both before deciding which rm to patronize and how much information to provide it with. The provision and disclosure of information presents tradeo s for all market participants. Consumers bene t from providing information to the rm, as this increases the utility they derive from the service, but they incur disutility from information disclosure. This, in turn, bene ts the rm providing an additional source of revenue, but reduces consumer demand for the service. We characterize equilibrium information provision, disclosure levels, and prices, and show that competition with privacy has several e ects on the marketplace. First, competition drives the provision of services with a low level of disclosure. Second, competition ensures that services with a high level of disclosure subsidize consumers. Third, rms maximize pro ts at the extensive rather than the intensive margin, outperforming competitors by attracting a larger customer base. And fourth, higher competition intensity need not improve consumer privacy when consumers exhibit low willingness to pay. Our ndings are particularly relevant to the business models of Internet rms and contribute to inform the regulatory debate on consumer privacy.