The Effect of Privacy on Market Structure and Prices

Protection of consumers’ privacy is often motivated by the fear that, without it, consumers may be exploited via personalized pricing. However, personalized pricing seems to be rare in practice. We explain how privacy nevertheless affects prices in search markets through its effect on market structure. If privacy is not protected, then in addition to consumer search, firms may engage in targeted advertising. We show that privacy protection reduces consumer surplus if firms price discriminate between the search and advertising markets. Absent such discrimination, privacy protection may either increase or decrease consumer surplus. We relate our results to the “privacy paradox.”

Joint with Zvika Neeman.