Econ Paper - Privacy

7/30/2019 Econ Paper - Privacy

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An Economic Model of Privacy: A Property Rights Approach to Regulatory Choices for

Online PersonalizationAuthor(s): Ramnath K. Chellappa and Shivendu ShivenduSource: Journal of Management Information Systems, Vol. 24, No. 3 (Winter, 2007/2008), pp.193-225Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/40398901 .

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AnEconomicModelofPrivacy:A Property ightsApproach oRegulatory hoicesforOnlinePersonalizationRAMNATHK. CHELLAPPAAND SHIVENDU SHIVENDURamnath .Chellappas anAssociate rofessorfDecision nd nformationnalysisat heGoizueta usiness chool, mory niversity.epreviouslyerved nthe acultyofMarshall chool fBusiness, niversityfSouthernalifornia,rom997 o2005.He receivedisPh.D.fromheUniversityfTexas tAustin. r.Chellappa'sxpertiseis nthe ield f lectronic arkets,igital oodspricing,nd conomicsf nforma-tion ecurityndprivacy.isresearchnpiracy asbeenwidely ublishedn eadingjournals nd conferences.is work n informationrivacynonline ransactionsreceivedheBestPaperAwardt NFORMS-CIST 2003. Professorhellappaworkscloselywithhemusicndustryntopics elated oforecasting,iracy,upply-chainmanagement,nd Tunes/digitalales.He currentlyeachesntheMBA and Ph.D.programstEmoryndherecentlyesignednd aughtcourse n T andmedicineintheMedicalManagementrogramt theUniversityfSouthern alifornia.Shivenduhivendus a ResearchAssociate ndVisiting ecturer t theGoizuetaBusiness chool,EmoryUniversity,nda Ph.D. candidatentheDepartmentfEconomics ttheUniversityf Southern alifornia. e received n MBA from heIndiannstitutefManagement,hmadabad,nd B.Tech, rom he ndian nstituteofTechnology,anpur. ebelongso he ndian dministrativeerviceIAS),mem-bers f whichwork n thehighestchelons fthegovernmentn ndia.Hisresearchinterestsrein the rea of economics f information,ntellectualropertyights,e-governance,ncentiveheory,egulationfnaturalmonopolies,ndprivatizationindevelopingountries.Abstract:Advancesn nformation-acquisitionechnologiesnd he ncreasingtra-tegic mportancefthisnformationavecreated marketor onsumers'ersonalandpreferencenformation.ehavioral esearchuggestshat onsumersngage na privacyalculuswhere heyrade ff heir rivacyostsfromharingnformationagainst heir aluefrom ersonalization.hrough formal conomicmodel fthispersonalization-for-privacyp4p) trade-off,e examinewelfaremplications ycharacterizingonsumptiontilitiess "no-free-disposal"unctions. e investigatethe ptimalityffour egulatoryegimesthroughllowance/disallowancefusage-enforcingechnologies,ndprivateontracts)y analyzinghe trategicnteractionbetween monopolist hooffersersonalizationervicesfree fcharge"nd twoconsumerypes privacynd convenienceeekers.Whilemany rivacy atchdoggroupshave calledfor echnologyestrictionsnd moreregulation,urresearchbroadlyuggestshatocietys betterffwithssignmentfpropertyightsver heirinformationoconsumersndfull llowance f echnologicalontrolnd ontractual

JournalfManagementnformationystemsWinter007-8,Vol.24,No.3,pp. 193-225. 2008M.E. Sharpe,nc.0742-1222/2008$9.50+ 0.00.DOI 10.2753/MIS0742-222240307

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1 4 CHELLAPPA AND SHIVENDU

abilities or hemonopolist.owever, hen rivateontractsreproscribed,he egu-lator hould lsopreventhe eploymentfusage-enforcingechnologies,articularlywhen hemarketspredominantlyomposed fprivacyeekers.nterestingly,nliketraditionalrice-instrumentarketsor oodswith ree isposal, regulatorhouldnot nly ncouragehismarket'snowledgefconsumers'4p preferencesut lsothevarious sesandbenefitsfpreferencenformationo thevendor.Keywords nd phrases: conomicmodeling,ncentives,ashbargaining,ersonal-ization, rivacy,ropertyights,ocialwelfare.

The FTC [FederalTradeCommission]anreassure onsumershat rivacypromises illbehonored.We areanagencywith nowledgebout oth on-sumer rotectionndthewaymarketsddressonsumerrivacyoncerns.Wewill ncrease ur nforcementf awsprotectingonsumerrivacy.- Timothy.Muris, hairmanfthe ederal radeCommissionThequestionsDoes personalizationeopardizeurprivacy?"nd If o,what houldthe aw do about t?"havebeenrecentlyaisedn the egal ommunitys a result fsignificantdvancesn nformationcquisitionndpersonalizationechnologies48].Commonly,nline ersonalizations offeredttwo laces: 1) informationoods hatarepersonalizedo ndividualastes,uch s managementf nvestmentortfoliosthroughersonalizedortalsndcustom undles fmusic nd oftware,nd 2) ser-vices hatccompanyhe electionndpurchasefvirtuallyllgoods, rom ooks oelectronics,hich re lsopersonalizedymanynline endors6]. n both ases, norder opersonalize service rproductoone'stastes,he onsumereeds osharehisorher ersonalndpreferencenformationith hevendor.Animportantspect f online ersonalizations that hese ervices regenerallyofferedree fcharge. owever,onsumers aynotuse all offeredervices ven fthey aluepersonalization,s they re ikely o be concernedbout heprivacyfthe nformationhat hey hare n order o use these ervices49]. Sucha privacyconcerns indeed alidbecause hebusiness ationale ehind ree ervicess oftenbasedonthe xploitationfconsumers'referencenformation,uch s for ricingandtargeteddvertising.MotivationWithtechnological dvances, herehas been a call forregulatingnformationcollection ndusage byonline irms. anyprivacy atchdog roups,uch s theCenteror igital emocracyCDD; www.democraticmedia.org),.S.PublicnterestResearchGroupU.S. PIRG;www.uspirg.org),nd ElectronicrivacynformationCenterEPIC; www.epic.org),avetaken heviewthat rivacy-relatednformation



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AN ECONOMIC MODEL OF PRIVACY 1 5

acquisitionhould e treated ith he ame lacrityy regulators would eprice/quantitynmany ther ublicutilities arkets.ntheUnited tates, heregulatorybody heFederal radeCommissionFTC) is taskedwith rotectinghe nterestsfan ndividualn ommercialransactionsboth nline ndoffline)ncludinghose hatinvolve rivacyoncerns. owever,DD andU.S. PIRGcontendhaturrentrivacydisclosureolicies retotallynadequate,Unfortunately,ver he ast everal earsthe TC has argelygnoredhe ritical evelopmentsfthe lectronic arketplacethat aveplaced he rivacyf very mericantrisk. heFTC shouldong gohavesounded very ublic larm andcalledfor ction concerninghedata ollectionpracticestemmingrom uchfields s Webanalytics,nline dvertisingetworks,behavioralargeting,ndrich virtualeality'media, llofwhich hreatenhe rivacyoftheU.S. public" 9]. EPIC also suggestshat rivacyhould e more egulated:"Emergingechnologiesepresenterious hreatsoprivacynd renot ddressedyself-regulationr aw"[20].Thepopular ress uggestshat with he apid rowthofonline ommercendrecreation,awmakersnd consumerslikearebecomingincreasinglyoncernedbout he ollectionnd disclosure fpersonalnformationover he nternet.espite he normityfpress overage,heUnited tates tillhasnounifiedegulatorychemeoprotectnline rivacy"42,p.2].Furthermore,ostpublic ollsonprivacylso askformore egulation;otonlydo 57-87 percentfrespondentsf a privacyollfeel hat hegovernmenthould assmore egulationsfor rivacyutmany38-63percent)lso feel hat urrentaws do notprotecton-sumersdequately43].Thequestionf nterestherefores thenature fregulationthatwill nhanceocialwelfaren the nline ontext.Generally, esearch n economics has interpretedrivacy s informationasymmetrythat s, consumers'rivate nowledgef their referencesndpricepoints reventsendorsromngagingnfirst-degreerice iscrimination.ndeed,recentaperneconomicscknowledgeshis ap:"whilemost onsumersrobablyhave an inherentreferenceor rivacy,he nalysis resentederefocuses n ..dynamicricing"44,p.632]. Suchformalizations relevantostudyingnsurancepremiums,ortgageates,rotheroods nd ervices herenformationsymmetrybetweenellers ndbuyersffectsutcomes10].However,heres relativelyittleformalnalysis f online rivacys discussednthis aper; hats,the oncern orprivacyhats subjective,ntangible,ndunique o an ndividual one that as beenexacerbatedyonline ommerce.he mpact fthis ype fprivacyoncerns notwith egardo immediatericediscriminationut general eedto be free rom"excessiventrusion,"s well as controlverhowthe ndividual'snformationaybe "usedorshared." hespiritfthis oncerns best apturedythedefinitionfprivacyrovidedytheCommitteenNational tatistics16], governmentalodythat as historyf ollectingnd haringndividual-levelnformation:Informationalprivacyncompassesn individual'sreedomrom xcessiventrusionn the uestofinformationnd an individual'sbility ochoose theextentnd circumstancesunderwhich isor her eliefs, ehaviors,pinionsndattitudes illbe sharedwithorwithheldrom thers"16,p.22].With his efinitionnmind, e seek o dentifyoptimalegulatorypproachesnmarketsor nformation.



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Interestingly,ur esearchuestionsre onsistentithhose rom neof he arlyreportsommissionedytheU.S. DepartmentfCommerceitledrivacyndSelf-Regulationnthe nformationge.Oneofcontributorsothat eportsks, Giventhat rivacys importanto so many eople, ndgiven hat nformationechnologykeepsraising ewquestions, hat pproachhould e adopted o dealwith rivacyproblems?n the ast,f emedies ere onsidered,he rimarytrategyastoresorttoregulation.hecall for he tate ocontrolndprotectrivacys a naturalesponseespeciallyn thefield felectronicommunications,iven heir istoryroundheworld s eitherstate-controlledelephonerbroadcast onopolyr ightlyegulatedsector"29].Thisreporturtherxaminesnumberf egulatoryssues nd ndswiththe uestion,Thereflexivepproachesoprivacy roblemsavebeen egulation,rdenial.Are here therptions?"Generally,nothermarkets,uch s telecommunicationsrutilities,ne roleofaregulatoryody uch s theFederal ommunicationsommissionFCC) istocurbexcessive endor ower,nd this s oftenccomplishedyprescribingrice aps,prohibitingrice ollusion,ndmonitoringther estrictiverade ractices.xtendingthis egulatoryole o marketsor nformationight uggesthat endorshould eproscribedor t east imited)romnformationollectionrusage, or ear fprivacyviolations. owever,heFTC has been omewhatonflictedboutmore ersusessregulation.t oneend,while heFTC hassoughtmore egulatoryuthority35], tsown ommissionersavebeen roubledy his spect. woof he ivemembersf heFTCdissented ithhe indingsf he irsteport.ommissionerrson windlewrotea long amningissentnwhich estatedhat he embarrassinglylawed"eportallsfor extensiveovernmentegulation"hroughbreathtakinglyroad aws" 35].Soan mportantuestions,how hould regulatoryody hoose regimehat rotectsconsumers'rivacyoncerns whilenot imitinghegrowthfonline ommerce?OverviewOurpaper uggestshatmarketsor onsumernformationrefundamentallyifferentfromraditionalrice-quantity-instrumenteduyer-seller arkets.he nformation-privacyontexts perhapsmore kin oa trading egime rbarteringystem. nekey spect fonline ersonalizationsthatt s offeredor ree,o from sers' ointofview,nformationsexchangedor ersonalizationervicesnd,from vendor'sperspective,ervices reofferedoacquirenformation.n a sense, oth gents reendowedwith ome nherent arketowern that vendormay imit henumberof services fferednd a consumer ay hoose o consume ess than henumberfservices vailablehence rovideessthan hemaximummount f nformationos-sible), houghvailable or ree.ntrinsically,ersonalizationsnotfeasiblewithoutsharing ersonalnformation,inaree llowance f services s notfeasiblewithoutsome xploitationfthisnformationythevendor.Research nthe egalandethical spects fprivacy asarguedhat rivacysnota fundamentaluman,moral, rabsolute ight;ather,t s a prudentialight39]. nfact,ntheU.S. udicial ontext,rivacyasbeen argelyreateds a "highlyubjec-



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Thismarketf onsumernformationasemergedn he nline ontextue o hreeimportantactors:1) Personalizationechnologies:ataminingechniquesuch srule-basednd collaborativeiltering36,52] that an usepersonalndpreferenceinformationacquiredvoluntarilyrthroughmonitoringrowsing ehavior) ndtailor uturenline ervices o an individual's eeds.Forexample, ewdocument-clusteringechniquesave mergedomanageWebpages nto ategorieshat acilitatedocumentmanagementndsubsequentccessandbrowsing50]. 2) Convenienceto consumers:he onveniencealue andhence he eductionnopportunityosts)created y havingmyriadervices ailoredo one's owntastes, articularlyree fcharge.3) Vendor'sccessto nformation:hevalue hat endors laceonknowingconsumers'references.PersonalizationechnologyWhilepersonalizationepends n howmuch nformations sharedvoluntarilyrthrough onitoring)ith he ervice rovider,ersonalizationechnologieseterminehowmanyuch ervices anbe offered.or xample,rovidingne'shome ddress oGoogle llows t o "autofill"his nformationhen hoosinghippingrcreditardoptions ith omeFroogle endors.naddition,o userwho ubscribesoGoogle'spersonalizedWebpage,this nformations also used toprovide ecommendationsformovie isting/timingsnthehome rea,maps nd trafficnformation,s wellascommonnformationuch sweathernd elevisionistings.mazon.com'superiorpersonalizationechnologieslso allow or ersonalizedecommendations,iscounts,coupons, ndshipping/giftptions asedonbrowsingehavior. ut not ll onlinevendorsre apable fofferinghe amenumberfpersonalizedervicesven f heymaybeacquiringhe ame mount f nformation.or given mountfconsumerinformationhe evelofpersonalizationechnologyeterminesowmany ersonal-izedservicesanbe created. his nformation-servicesappingsgiven yg~l(i)= s,where s customer'sreferencenformation,is thepersonalizationervices,ndg~'(.) is the urrenttate fpersonalizationechnology.We assume hat hemarginalate fpersonalizedervices hat anbe provideddecreaseswith ncreasinglyersonalnformations theability otailor ervicesbecomesncreasinglyifficult.his mplies hat ~](.) s concave rg(.) is a convexfunction. ecause no personalizationanbe providednthe bsenceof customerinformation,ehaveg(0) = 0,and f/representshe ntirenformationet hat anbe usedtodescribe onsumersndtheir references,henwehaveg~l(i)- S,whereS isthemaximumossible ervice etfor given tate fpersonalizationechnology.Any ffineransformationunction ill uit his bstraction.Consumer'sersonalization-for-Privacyrade-OffPersonalizations infeasibleo achievewithoutoss ofprivacy49]. Research nprivacynformssthat onsumersrewillingo disclose heir ersonalnformationinexchangeor ome conomic r ocialbenefits8, 23].An ndividual'secision o



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share nformations said to be basedon a "privacyalculus" hat s the ndividual'sassessmentfbenefitsndcostsfromharingisor her nformation12].Theprimaryenefitoa consumer romsing ersonalizationervicesscapturedby marginalaluefor ersonalizationarametersuch hat he enefitoconsumeris ncreasingnd inearn he umberf ervicesonsumed. rioresearchn servicesmarketingasarguedhat onsumers alue ndividualizedreatments.hisresearchsuggestshat he erceivedualityf ervice sdependentponhow consumerer-ceives is rher ndividualeeds obe met27].Personalizedervices an lsoreduceinformationverloadndhence ncrease ser atisfaction25].Theconveniencealuethat ersonalizationrovidesan also be understoods the pportunityost ncurredbyan individualn the bsence fpersonalization.his s often bservedn uxurygoodsandservicesmarkets, here he llaymentfopportunityost s extractedthrough price remium.usiness xecutives hohave high pportunityostoftime ften referostay nhigh-endotels hat harge premiumutpersonalizerooms nd erviceso theirpecificastes ndrequirements26].The mportancefthis onvenience ay ary romne ndividualoanother. ecentmpiricalesearchfinds hat hese ariationsn consumers'aluefor ersonalizationtronglynfluencetheirntentiono useonline ersonalization8].Thewillingnesso share nformations known obe related o an individual'sperceptionfrisks fdisclosure14], ndthus ndividualsaryn theironcernsorprivacy8]. nprioresearchn conomics44],privacyscapturedy n ndividual's

valuationor producteing ept s privatenformation,nd he orrespondingostis the xtra rice hat hevendorwillcharge ponknowinghe rue aluationthusthe onsumeroesnotwant o share hisnformation).nourwork,we ntroducenindividualonsumer'srivacyost oefficientsuch hat he ostofusing person-alized ervices y sharinginformations given yri2.Note hat his bstractionfprivacyostcoefficients consistent ith ur definitionfprivacys some ntan-gible ost ufferedyeach ndividual.ndependentfwhat hevendormaydo withthisnformation,his oefficientaptureshe onsumer's elief egardingis or hercomfortnsharing ersonalnformation.heprivacyost s assumed o be convexas informations orderednd ncreasinglyersonalnformationeeds o be sharedbythe onsumern ordero usemore ersonalizedervices. ence, he onsumer'snet enefitromsing ersonalizationan bewrittens v.(s)=ps - rg's). Note hatvc(s) s an nverted-shapednonmonotonicnd trictlyoncave) unctionns,sug-gestinghat singmore ervicessnotnecessarilyetter or consumer.hisutilityis characteristicfgoodswith o-free-disposal.fa consumererives certain alueV(z)fromonsuminghe ood and fP(z) is the rice hat he onsumeraysfor hegood, henhe et tilityo n ndividualn onsuminghe ood and he ersonalizedservices isgiven yU(z,s)= V(z)- P(z) + vc(s).Vendor's osts ndBenefitsfOfferingnline ersonalizationor reeOnline endors onotdirectlyharge price or ersonalizationervices, ut heyderive ther enefitsromnvestingnpersonalization.he most bvious nddirect



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200 CHELLAPPA AND SHIVENDU

value ofconsumernformations therevenue romharingr selling referenceinformationo supply-chainartnersnd advertisers.orexample,many ortals,newspapers,ndotherWeb ites re attractiveo advertisersot nly ecause fthenumber isitorso the itebut lso becauseof theirbilityo create easonablyc-curate ustomerrofileseading otargeteddvertisingfforts.ecent esearchaselaborated n therole and mportancefWeb-based ersonalizationn acquiringcustomernformationor thermportanturposess well 30, 51].Personalizationllows vendoro not nly cquire ransactionalnformationrompurchasesut t alsohelpshim r her nacquiringnformationboutbrowsingndother ctions f the onsumerhatmaynothave ranslatednto fiscal ransaction.This nformationanhelpdifferentiatevendor rom is or hercompetitorsndallowshim r her o understandemand,managenventory,nd create n efficientsupply hain.Productionaradigmsuch s ust-in-timeJIT)owetheiruccess omanagingnformation.n themarketingnd,customernformations crucial orprice iscriminationnd egmentation.thasbeen rguedhatmarketingtrategiesfsuccessful irmsepend naccessto and ffectiveseofdetailedustomernforma-tion 1,3, 12,17,32,34].Allonline endorso not alue ustomernformationtthe ame evel. hoseven-dorswhorely nmaintainingmallernventoriesnd nefficientupplyhainwouldplacea greatermphasisnknowingheirustomersetters comparedo vendorswhocanmanagearge roductnventoriesndmainlyarget homogeneousroupof ustomers.or xample,thasbeen uggestedhat nline endors ith real-timesupplyhain nd hose ealingwith igital roductsavegreateraluefor ustomerinformationuetothe on-demand"roductionnddeliveryequirementsnsuchenvironments2].To capturehisheterogeneity,e introducemarginalalueforinformationarametersuch hat vendor's enefitromcquiringnformation, yofferingersonalizationervices, sgiven youor, quivalently,g(s).Themarginalostofprovidingn online ervices negligible;owever,here recapital r ne-timeosts ncurredy he endor.roadlyherere hreeypesf apitalcosts nvolvednprovidingersonalizationervices infrastructure,rustuilding,and nformationrotectionr iabilityosts. he nfrastructureostsmainlyrise rominvestmentsnpersonalizationools uch s collaborativeilteringystems,ndrule-basedengineshat rebuilt nto ustomerelationship anagementCRM) systems[21].Theabilityocollectnformationepends pon onsumerrustnretailers19],and his rusts ntrinsicallyinked o he eputationf firm15,38,47]. nthe nlineworld, eputationf a firmanbeenhancedhroughrust-buildingctivitiesuch sallianceswith rustedhirdarties,mplementationf ecurity echanisms,eassur-ances hroughisclosure otices,ndcompliance ith TC rules 35].Vendorslsoneed oprotecthenformationhey cquire nd tore. heynvest othn echnologi-cal protection echanisms24] and nhaving legal nfrastructure.hemagnitudeof these nvestmentss domain ependentincetheU.S. Congress35] stipulatescontext-specificequirementsndguidelines,uch s theChildren's nline rivacyProtectionct COPPA)and heHealth nsuranceortabilityndAccountabilityct(HIPAA) [4, 18,40].As thenature f nformationcquireds increasinglyersonal



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AN ECONOMIC MODEL OF PRIVACY 201

withncreasingumberf ervices,he apital osts re ssumed obe convexwhilethemarginalosts fservingn additionalonsumeremainero.We ntroducecostcoefficientsuch hat henet apital osts reconvex n thetotal umberf ervices ffered,iven y s2.We can nowwrite heprofitv) fromofferingersonalizationervices asvv(s) ag(s) -s2.vv(s)sa nonmonotonictrictlyconcave inverted -shaped) unctionns, suchthat heres an interiorptimumgiven ys* e (0,5) that s the olutionomaxag(s) - s2,where "(s) < (2/a),y . The ntuitionehind his s thatwhilevendors re still indingnnovative aystouse consumernformation,he nformationcquisitionechnologiesreevolvingata muchmore apidpace.This would mply hat hefeasible etofpersonaliza-tion ervicessgenerallyreaterhan hevendor'sdealnumber f services.We cannowwrite hevendor's etprofitromelling goodz,andofferingersonalizationservices as n(z,s)= R(z) - C(z) + vv(s),where (z) is the evenue rom ndC(z) isthe ost fproduct.

TheRegulator'sroblemIn theUnited tates,ny ommercialransactionhatnvolves he ollectionnduseof onsumernformationalls nderhe egalpurviewf he TC.Privacyssues lsoreceiveonsiderablettentionrom therovernmentalndnongovernmentalntities,includinghemedia. heopinionsf hese roups arycross he rotectionpectrum;while omehold onsumerrivacyacrosanctndargue hat onsumernformationshould otbecollectednany vent,t s nowgenerallycceptedhat onsumern-formationan becollectedndused s long s thedatagatheringntityonformsothe airnformationracticesrincipleecommendedytheFTC.While egislativebodies ndpopular ress outinelyiscuss he hreatso consumerrivacy, hat smissing,owever,s an academic ebate nthe ormulationf deal egalframeworksthat ake nto ccount he echnological,ehavioral,ndeconomic ationalen thecollectionnduseofconsumernformation.For xample,houldhe TC take he iew hathe hreatoconsumerrivacys soseverehatocietys betterff yrestrictingendorsntheirnformationcquisitionstrategies?rshould heFTC take he pproachhat onsumernformationsreallya propertyhat he onsumerwns nd he endor alues, nd hould hereforellowthe endornd onsumero xchangehis ropertyhrough utualgreements?hereare wo imensionslongwhich he egulatorandirectlynfluenceendor/consumerbehaviornd thus hemarketutcome:1) byallowing/disallowingertain sage-enforcingechnologiesnd 2) byallowing/disallowingbuying"f nformationorselling f ervices).As discussed arlier,onsumersrefern ideal evel ofpersonalizationervicesdependingpon heir ersonalizationor rivacyp4p)ratio.However,t spossiblefor endorsorequireonsumersousecertainnforcingechnologiesuch s browser-helper bjectsBHO) that anforce onsumersoacceptmonitoringf nformationthatmay e above heir referredevel.Note hat onsumers ay till ignupto usethis uboptimalevelof servicess theymay till e enjoying ositive tility. any



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Table 1 RegulatoryhoicesAllowance f Private ontractualgreementsTechnology for Regime 1 (R1) Regime 4 (R4)usage enforcement Vendoris not allowed to Vendor is allowed to"buy" nformationnd "buy" nformation uthe or she is notallowed he or she is not allowedto use technologies that to use technologies thatenforceusage. enforceusage.

Regime 2 (R2) Regime 3 (R3)Vendor s notallowed to Vendor is allowed to"buy" nformation ut "buy" nformationndhe or she is allowed to he or she is allowed touse technologies that use technologies thatenforceusage. enforceusage.

legitimateendorsmploy ersonalizationoolbars ith HOs,but t s the ampantmisuse f uch echnologieshat as ed tospyware oncerns.hus, here as beenclamor romne section fprivacydvocates or completeanordisallowancefthese echnologies.urther,omevendors ave lsobegun oofferncentivesintheform f oupons/discounts)or he sageof nformation-acquiringechnologiesuchas toolbars, hichiterallymountso"buying"ustomernformation.ntuitively,tmightppear hat summaryan ofthese endortrategies ighte bestfromhesociety's oint fview, articularlyn ight f concerns ssociatedwith onsumers'privacyrotectionndvendors'monopoly owernthismarket.However,t s not lear f uch noutrightisallowance illbe welfaremaximiz-ingfor wo easons:1) the niqueno-free-disposalature f he tilityunctionthenonmonotoniconcave hape) mightndow he onsumer ith omecontrol,nd(2) prior egalresearch asarguedhat ontractsetween uyersndsellersmaybethemost ppropriateools or rotectingnformationrivacy48].Hence,weformallyexamine elfaremplicationshen vendors confrontedith achof he egulatoryregimesutlinednTable1 Apopular erspective ightuggesthat egime s dealfor he onsumersociety)ndregime isperhapsheharshest.To investigatehe rue ature feachoftheregulatoryegimes,n thefollowingsection, estudy monopolist'sptimalmarkettrategynd he esultingonsumersurplusnd ocialwelfare.urther,n his ontext,eanalyzef herere ny axationpolicies hat ouldbeemployed ythe egulatoro benefitociety.Regulatoryegimes ndMonopolist trategiesWeconsider vendorwho annot xtract ny eparate rice remiumsor erson-alization thats,he orshedoesnot harge he onsumer or sing ersonalizationservices.his sconsistentith he trategiesf nline endorsuch sAmazon.comrBarnes Noblewww.barnesandnoble.com)hat o not xplicitlyhargeor roviding



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Table2. Objective unctionsndStrategypaceStrategypace Objective unction Constraints

Consumer maxsps rg2(s) ps - rg2(s) 0/g[0,/| s>0Vendor s g [0,S] maxsag(s) s2 ag(s) - s2> 0s>0Regulator Regulatoryegime maxs{ps rg2(s) ps - rg2(s) 0g {R1 R2, R3,R4} + ag(s) - s2} ag(s) - s2> 0s>0

personalizedecommendationrother ervices.While his onsumerurplusannotbeextracteds prices, endorsmaintainhis urpluso the onsumers it translatesto oyaltynd ncreasedwitchingosts.Thus,nourmodel, (z) and erviceevelaretwo ndependentecision ariables or hevendor. s a monopolist,hevendorwill et price (z) = V(z)such hatU(z, ) = 0.Therefore,norder or s to examinethe erviceevel hatwillbe offeredythe endor, e need oonly onsiderhe or-tion fthevendor's rofitrom ersonalizationervicesvv0)= ag(s) - s2 nd theportionf he onsumer'stilityhat s derived romersonalizationthats,vc(s)ps- rg2(s). eforeweanalyze endortrategies,e firstlaborate n thenaturefthe onsumer'ssageofpersonalizationervices s outlinednTable2.Lemma 1: A consumer's maximum(s'Vc(Sc0)=0)nd utility-maximizing(Sc^argmaxs{ps-rg2(s)})umberf ervicesreincreasingn the onsumer's4pratio(p/r).Proof: ee theAppendix.

Thep4pratio s a criticalarameteror nalysis fconsumer ehaviorn thismar-ket. t not nly etermineshe onsumer'sndifferenceoint ut lso determinesheconsumer'sptimal ehaviorfthe onsumeras full reedomo choosehisorherserviceevel.A large alue f he 4pratiosrepresentativef onsumers hoderivehigh enefitsromersonalizationervicesrpossessow oncern or rivacy,hereasa lower alueofthis arameters indicativeftheprivacy-sensitiveypes. ased onthep4pratios, e define marketo consist f two onsumerypes; convenienceseekerwhosep4pratioshigh noughuch hat e or shewillprefer ore ervicesthan hemarketfferingnd&privacyeekerwith lowp4pratio uch hat isorherideal,preferredumberf ervicess lower han hemarketfferingDefinition).

Definition: Convenienceeekersp4p)are thosewhose 4pratiop/r)s suchthat heir tility-maximizingumberf ervices*> s* and the rivacyeekers(p4p)are thosewhose 4pratio s such hat heir tility-maximizingumberfservices* < s*,where*= argmaxjag(s) - s2}.Figure shows he elativereferrederviceevelfor he wo onsumerypeswithrespect o the vendor's ptimal ervice evel.From vendor's erspective,hen



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1 0 i'd , ifa) sPersonalizationervices (5)

Figure . Profitunction ftheVendorndUtilityunctionsftheTwo Consumerypes/ 0 /=J / 2 *= 3 / 4

Regulator Vendor Vendor Consumer Personalandchooses observes determines chooses preferenceregime regime nd service et service et informationconsumer tobe he or she exchanged orcharacteristics offered will personalizedconsume services

Figure . Sequence fEvents

consumerypes aryignificantlyntheirreferenceor ersonalizationervices,hevendorhould eek eparate trategiesor ach consumerype. uchanapproachsconsistent ith riorconomicsiterature,here monopolistn nexperienceoodsmarket ivides isorher onsumersnto ptimisticndpessimisticypes ependinguponwhetherhey verestimater underestimateis or herproduct'suality,ndpursues ery ifferenttrategiesor ach ofthese onsumerypes41].Others avealso usedthis pproach fexploring eparate trategiesuch as when onsumersoverestimatendunderestimatehe it fdigital oods otheirastes7].Thetimingofstrategicnteractionetweenhemonopolistnd the onsumersgivennFigure2.Now weanalyze hemonopolytrategiesnderachregulatoryegime.RegulatoryegimeRegulatoryegime describes setting here he egulatorestrictshemonopolistfrom othmployingusage-enforcingechnologyndfromngagingnprivateon-tracts. his nvironmentsdescriptivef impleWeb-basedersonalizationwith o



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toolbarsrBHOs)wherehe onsumerullyelf-selectsromhe et f ervices fferedby he endor.nour ersonalizationontext,he onsumeroesnot ay dollar aluefor ersonalizationut atherays n the orm isorher nformation.or given etof ervices,f he onsumerrovidesnformationbout isorher references,hen eorshegets erviceshat retailored o hisor her aste.Whennotechnologicalsageenforcements inplace, he onsumer ill imply sehis or herutility-maximizinglevelofservices. rom he hape ftheutilityunction,ecan see that his ervicelevelmay eequaltoor ower han hemarketfferingepending ponwhetherheconsumer'stilitys stillncreasingrdecreasingtthat oint.RegulatoryegimeNowconsiderhe ituationhere he egulatorllows he se of ookies, HOs,andotherechnologieshat an be embeddednside f Webpagesand toolbars.n thissituation,vendoran create toolbarwith certain ixed umber f services uchthat consumer ho nstalls he oolbarsnecessarily onitoredor hose iecesofinformationandhence rovidedorrespondingersonalizedervices). or xample,Google llows onsumersochoose henumberf ervices hatwillbepersonalizedon itstoolbar,utusers f ts Gmail ervice annot ptout ofreceivingersonal-ized advertisementsased ona systemhat ctuallycours hroughuser's -mail.Similarly,onsiderhe aseofthe reeRealAudio ervice; consumer hovaluespersonalizedadio ervice anvoluntarilyndicate isorher referencesor ariousmusic enres,uthe orshecan also beforced oprovide ther ersonalnformation(oftenn asterisk*]next ofieldsndicateshat illinghemn scompulsory),uchas an e-mail ddress without hich he ervicemaybe unavailable. ahooe-mailbecomesunavailablef a consumerurnshe "cookies"feature ff as this s themechanismhroughhich hevendor racks sage).

Lemma : Under egime,a monopolistill ffer*to the rivacyeekerp4p)andoffer* to the onvenienceeekerp4p),whereas nder egulatoryegime2,themonopolistill ffer in{s,s*} othe rivacyeekerp4p)andoffer* tothe onvenienceeekerp4p).Proof: ee theAppendix.

sv*s the tility-maximizingumberf ervices or he endor thats, he endor'spreferredetofservices andbecause he onvenienceeeker's tilitys increasingats *,he or shewilluse all ofthe ervices fferedythemonopolistrrespectivefthe egime. owever,he ehaviorftheprivacyeekersclosely ied o the egula-tory egimes. ydefinition,heprivacyeeker's tility-maximizinget of servicesorhisorherdeal erviceevel s less than hat fthe endor.he nonmonotonicndstrictlyoncavenaturefthe onsumertilitymplieshathemarginalenefitromconsumingersonalizationervicessoutweighedy hemarginalossfromrovidingprivatenformationtany erviceevel bove ' Under egime ,when hevendorcanenforcesage,he or heonlyneeds oconsider hetherrnot he onsumer ill



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participate.fvc(^v*)0,then hevendorwilloffer*,and since hevendor's rofitcurve s always ncreasingtany ervice evel essthan *,he or shewillpreferooffer he maximum umberf services hat heprivacyeekerwill use that s,5c.However,nder egime in the bsenceofanyenforcementechnologies,hemonopolists unable o exercise isor hermarketowernofferingersonalizationservicess theprivacyeekerwill hoosehis or herpreferrederviceevel thats,hisor her *.As any ervices bovethis evelwill mply wastefulnvestment,hevendor ill imply indtoptimaloprovide*.

Proposition: Theregulator ay eindifferentetweenegimesand2 (allow-ance nddisallowancef nforcementechnologies)nderitherf he ollowingtwo onditions:(a) Themarketsprimarilyefinedy onvenienceeekers countero ntuition,the llowance/disallowancefsuch a technologyas no bearing n the on-sumer,roducer,nd socialwelfare hen hemarketsdefinedy onvenienceseekers.(b) Themarketsprimarilyefinedyprivacyeekersnd themonopolist'sn-vestmentnenforcementechnologiessgreaterhan v(min{s,s*})vjs*). Thevendor ainsmonopolyowerwithnforcementechnologiesnlywithrivacyseekersthe onsumerurplus f his ype ecomes ero s inanymonopoly).Ifboth onditionsrenotmet,he egulatorhould trictlyrescribeegime.Proof: ee theAppendix.

The intuitionehind I is that combinationf distributionftypes nd theno-free-disposalaturef he tilityunctionanpreventhemonopolistromxercisinghis or herpower nd thus bviatingheneedfor egulation.owever,heneedforregulatory echanics ecomes videntwith hedecreasingostsofsophisticatedtechnologieshat an beused oenforceertainevels f nformationonitoringndusage.So,the nly ituationver imewhere he egulatoreednot tepn s wherethe onsumers' eedfor ersonalizationervices ncreaseslongwith echnologicalsophisticationfenforcingechnologies. hile his s clearly burden o bebornebyvendors fpersonalizationechnologies,n alternateossibilitys that egulatorsinvestnconsumerducationuch hat he verallevel fprivacyoncernecreaseswithncreasingnderstandingfpersonalizationechnologies.It s also critical or sto understandhe rivacyeeker's ehavior s itmay artlyexplain hefailure f somebusinessmodels n the nternethatwerebasedsolelyontheirbilityoacquire nd sell customernformation.anyportalsnde-tailersoperate n thenotion hat ven fa productmaybe sold at costprice, rofitsouldstill e realized hroughellingnd haringonsumerreferencenformation.hesebusinessmodels peraten the xpectationhat ntenserice ompetitionill ttractlargenumbersfconsumersnd nformationn them ndtheir referencesanbeminedoas tobe attractiveor roductlacementsnd dvertisements.ommonly,hefailuref ome f hese usinessmodels asbeen ttributedoexaggeratedaluation



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on customernformation.owever,tmay ndeed e that hefirms erefacedwithprivacyeekerswhoonly sed heirptimalevel fservices ndthereforerovidedinformationelow he nline endor'sxpectations.The cost f nforcementan be understoodn another ay s well. t could lso beinterpreteds the urdenhathevendorswillingoplaceonthe onsumer ithoutthe ear f osing im rher. or xample, icrosoftassport illdisable consumer'saccountftercertaineriodf nactivity,hus orcinghe ser oreregister,ut uch nactionmay e ofgreatnconvenienceo he ser ue o ost -mail ndreconfigurationof tock ortfoliondother ersonalizedervices. hisraises hepossibilityhatheusermay ltogetherbandon sing assportervices. hus, ven f heprovisionorenforcementxists ndthe nvestmentosts re alsonothigh,hemonopolisteedsto considerhe urdenn the onsumersnadoptinguch echnologies.RegulatoryegimeWhen monopolistashigh nformationeeds,he or shemaynotrestrictim- rherselfoacquiringnformationhroughonsumers'eedfor ersonalizationlone.Themonopolist ay n fact hoosetoprovide ther ncentivesin addition o theconvenienceromersonalization),uch s coupons, iscounts,nd ven mallmon-etaryewards,omotivatehe onsumeroperhaps se more ervices han ptimalna pure ersonalization-privacyxchange.Many nline endors,ncludingmazon,com,have ntroducedncentivesn he orm fdiscountoupons asedonconsumers'clickinghroughtsGoldBox servicesnd haringertainnformation.rom privacyadvocate oint fview, uch trategies ay mounto"buying"nformationhroughsomeprivateontractndhence lag rivacyoncerns.hus, rom regulator'sointofview, neneeds o evaluatehe mplicationfallowance f suchprivateontractsofferedlongwith ersonalizationervices. learly, monopolist illneed o ngagein such ontractsnlywhen e or shehasto ncentivizehe onsumerousebeyonds*and, s discussed arlier,hepresence/absencefenforcingechnologiesecomerelevantue tothe nverted-Uatureftheutilityunction.ence,wefirstonsiderregime wherehe egulatorllows or rivateontractss well s the se ofenforc-ing echnologies.Under he llowance finformationbuying,"etthevendor ndtheconsumerengagena privateontracthroughtransferood t).Wedevelop hese ontractsbetweenhe rovidernd he onsumerhroughbargainingechanism.neconomicsliterature31],bargainingsemployednsituationsn which1) the trategiclayers(agents) ave he ossibilityfnegotiatingmutuallyeneficialgreement,2) thereisa conflictf nterestboutwhichgreementoconclude,nd 3) noagreement aybeimposednplayers ithoutheirxplicit pproval.nour ontext, hen herereno enforcementapabilities,he endorsforced ooffer* tothe rivacyeekers. tthis oint,ne gent'svendor's)urpluss ncreasingn he umberfpersonalizationservices, hile he ther'sprivacyeeker's)sdecreasing,ndhence he econd ndthirdonditionsor argainings discussedbove learlyxist. heres a conflictfinterestroundhenumberfpersonalizationervices,nddue o ack f nforcement



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capabilities,heprivacyeekerwillnotuseany ervices bove * even fheor shederives positive tility.herefore,norder ocreate nagreementoint srequiredbythefirstondition, e introducehe ransferood ntoboth hevendor nd theconsumer'stility,ith he ssumptionhatwhen he onsumergrees o receivetransferayment,eor he lsoagrees obemonitored.hus, he endorsguaranteedthathe onsumer illuse allof he greed-uponervicesrrespectivefwhethert smore r essthan he onsumer'sptimum.ote hat he ransferood hat he endorisnowwillingoprovidewilldepend n the greed-uponervice evel.We can nowformallyewritehevendorndconsumer'stilityromersonalizations

v,(j) = ag(s) - s2 t(j)vc(s)=ps-rg2(s) x(s). (1)Lemma : In order o determineheoptimalncentivex(s))tthevendor ndprivacyeekerwillbargain vern(sB) maxj(vjs) + vv(s)) (vc(s*) vjs*))},where he olution(sB)to themaximizationroblemsthe greed-uponerson-alizationerviceevelunder egime.Proof: ee theAppendix.

Inregime,themonopolist'sroblemnd he onsumer'sroblemrenotndepen-dent f ach ofother ndhencewe cannotimplymaximizeheirespectivetilities.Further,heproblems also not ne ofsimplymaximizinghe ombinedtilitiesswe also need mechanismhat rovideshe ncentivesor oth artieso enterntocontracts.herefore,e adopt n axiomatic argainingrameworko identifyhesolution et as firstescribed yNash [28].The basicsettingtates hat here replayerswhobargain ith ach other ndeither each nagreementn a setA,orfailto reach n agreement,n which ase thedisagreementvent occurs. he set ofallutilityairs hat anbe the utcome fbargainings theunion fthe et0 ofallpairs,(0,u2(a))for g Aandthe oint = (u^D), u2(D)),wherew,(.),w2(.)re heutilities ftheplayersngagednbargaining.hepair 0, d) is theprimitivef thebargainingroblem.fthere xists bargainingolution o ourproblem,hen ursolutionhould elong o a set0 that atisfieshe xioms f nvarianceoequivalentutilityepresentationsINV), symmetrySYM), independencef rrelevantlterna-tivesII A),andpareto fficiencyPAR) [31].Therefore,e constructur et0, andformallyescribe hedisagreementointtoget he tilityairs0,d). Theutilityairs re onstructedromhe et fpossibleagreementssetA) andthedisagreementventD). In the ase ofprivacyeekers,thedisagreementoint incontexts sc' thepointwhere heprivacyeeker eelssatisfied hile hevendortills eelshe or shecan do better.hisprocess an bede-scribed s one whereheprivacyeekergrees o use some > sj inreturnor omeamount fthe ransferoodx.And fnoagreementsreached,hen oth arties illrevertothepointwhere he onflictf nterestirstppeared thats,s* andthevendorwillprovide o ncentivertransferoodatthis oint.Hence,D can be for-mally epresenteds D = [s*,0] (Figure ). Nowwe identifyhefeasible etA forthe gents. hefeasible etrepresentsllpossible greementointstartingrom he



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disagreementoint sc'0}. In our ontext,hevendorwillofferny > s* and willprovideomext.s long s hisorher tilityromoing o is at east smuch s atthedisagreementoint. imilarly,he onsumers illuse the etof services ndacceptthe ransferoodas long heir tilitys greaterhan requalto what hey njoy tthe isagreementoint. ence, urfeasibleet 5,1} for heprivacyeekersndthevendor hould atisfy

VC(S) + T(S)>VC(S;)VV(S)-T(S)>VV(SC*). K >Thefeasibleegionor his ncentiveies bove he rontieriven yvc{s*'which sthe tilityhe onsumerset t he isagreementoint. he ncreasingonvexhape ftheso-utilityurve or he onsumersbecause, fter*9 he tilityromhe xchangesurplussconcave nddecreasing. ence, he ate t which (s) is increasing ithcorrespondso therate t whichvc(s) s decreasingns. Hence, hefeasible egionfor he onsumersepresentscompensationhats more han requalto the oss nutilityuetousing ervices igherhanheirptimal.imilarly,he endor's easibleregionfofferinghisncentive(s) iesbelow he rontieriven yvv(s*). heshapeof he endor'sso-profiturvesconcave,s he or he anprovidencreasing(s)ashisorher wnprofits increasingntil *.Afterhis oint,hevendor's rofiteginstodecreaserecall henonmonotoniconcavenaturefthevendor's rofitunctionin ) in ervices o the mountf ransferoodhe or he anofferlso decreases. he

vendorannot fferny ransferood fterome erviceevel s : vv(s) vv(s*). otethat rationalendor illnot hoose oofferny ervice reaterhan*,as the tilityofboth gentsredecreasingeyondhis oint. herefore,he ntersectionegioninFigure is thefeasible etofagreementoints or urbargainingroblem.hefeasibleetof greementoints an then ewrittensA = {(s, x(s)) : vc(s)+ x(s) > vc(st*lvv(s) x(s) > vv(sc*' > se' x(s) > 0 } (3)As discussed n thebeginningf this ubsection, e nowconstructheutilitypairs0, d).Thepoint = (yc(s*) 0,vv(s*) 0) is theutilityo the wo gentstthedisagreementoint.Withinhe egion ,the etofagreementoints orresponding

tos = sBrepresentshevaluesof transferoodx(s) where he ombinedxchangesurplussmaximized. apping hefeasible etto theutilitylaneof the onsumerandvendor, eget he olutionet0. The frontierfthe olutionetrepresentsheline orrespondingo serviceevelsB nd ll feasible alues f he ransferoodx(s).Aswe observe rom igure ,our olutionet0 is compactndconvex.Lemma : Inregulatoryegime,themonopolist ill rovidehe rivacyeekeran incentiveiven yx(sB) ((vJsB) vJsB)) (vjs*) + vv(s*))/2forhichheprivacyeekerwill gree o use the erviceevelsB= s* < s*.Corollary: Evenwhen hevendoracesconvenienceeekers,t soptimal orhim r her oengagenprivateontractsnd he orshe will fferomesB s* >s*,andcharge fee given yx inLemma .Proof: ee theAppendix.



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(a) (b)j-(s'' Privacyeeker'sso-UtilityCurveVS'


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A= vw(sB) B = vw(sl) C = vw(sl)Ar B "^ - r -^

1 *> i7- t^HH-A"g / AV"^ ; i ji / s ; i ; / / ! I '=3 i // i i i* *C CoPersonalization Services c B v

Figure. ProducerndConsumerurplusnd ocialWelfarevides sthroughheGoldBoxprogramhereintdiscountsroductsromts urrentinventoryttractinghe onsumerso browsehroughhis ist. ome ofthe fferingsin this ist renot ndividualtems ut onsumersre sked bout roductategoriesin whichheywouldmostikely e interested.hus, ven f he onsumerventuallydoes not uy product,e or hehasprovidedome nformationn hisorher refer-ences s he or shehunts or sale.Further,he tore lso incentivizesonsumersopartwith heir riends'ndfamilymembers'-mail ddresses ypromisingo sendcoupons frelatedroducts.learly,his s a pieceof nformationhat consumersunlikelyoprovidefheor heonly sed he ptimalevel fpersonalizationervices.Morerecently,mazon.com as evenbeenoffering0.05 toconsumerso inducethem o answerimple uestionsbout heir roduct references.Proposition: Countero ntuition,hen regulatorllows rivateontractsnthemarketor nformation,he onsumer,roducer,nd ocialwelfarere maxi-mizednlywhen sage nforcements allowed.Alternatively,hen he egulatorallowsprivate ontractsn the bsenceof usageenforcementr viceversa, tleastonepartyvendor/consumer)snecessarily orse ff.

Proof: ee theAppendix.Ourresultsuggesthat venwhen egulatorso not llowvendors odirectlyuyconsumernformationinorder oprotect rivacy),hefirmsanpursue propertyrightspproachn hewell-definedontextfpersonalizationnd othe enefitf heconsumersswell s the ociety. ur pproach onvergesoCoase's [11]observationthatfpropertyightsre nitiallyssignedndvaluationsreknown,hen argaining



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will ead to a socially fficientutcome. n mportantspect four esultss that heconsumerains utilityhatseven reaterhan isorhermaximumtilityromnlyusing isorher ptimal ersonalizationervices. hus,ncentiveor he onsumeroparticipatenbargainingsnaturallyuiltn,while lsomaximizinghewelfareo hesociety.he ncentiveor hevendoroparticipaten such ontractss alsonaturallypresentfhe or she sunable o exercise isorhermonopolyehavior.During he llowance fenforcementechnologies,he egulatoranalternativelyconsider formftaxationhat an be beneficialothe ociety.While he onsumersdo notpaya "price" or heuse ofservices,hey ay nthe ormf nformationndthe egulatoranpossiblyax hevendor's ollectionfthis nformation.uch taxwould eequivalento he igovianax 33]thatstypicallymposedn he ontextfpollution herehererenegativexternalitiesnd he olluterays tax nproportiontothe nits fgoodhe or heproduces.hePigouvianax eads othe nternalizationof xternalitiesn he roducer'srofitunction.nour ontext,he egulatorantheo-reticallympose taxon thevendor hat akes ffectrom hepointV5 s*) wheretheuseof ervices ives negativemarginaltilityothe onsumer.heoptimalaxwill be designed ytheregulatoruch hat hevendor's rofit-maximizingevelofservicewhere rofitunction ow ncludes he ax to be paid)will be the ame sthewelfare-maximizationevelofserviceV), and tax mposed n thevendorwillbegiven y v'c(s*). here re wopointsobe noted egardinghe axation:irst,hewelfares maximized utunlike n thebargainingontext,he xcessprofits paidto thegovernment.econd, hePigovian axhasgenerallyeencriticizeds beingunrealistic;s for he ptimalolution,t srequiredhat he egulatornow he har-acteristicsf he endornd he onsumersi.e., , ,/?, ). t sperhapsmore ealistictopresumehat endorsnd onsumersnow achother'sharacteristicsasrequiredinthe argainingpproach) atherhan he egulator'snowledgefthe ame.RegulatoryegimeRegulatoryegime describes he situationwhere heregulatorllowsprivatecontractsutdoes not llowthemonopolisto ncorporateny ort fenforcementtechnologyhat anexternallyllowhim r her o ensure heusageofa particularlevelofservice. t s apparenthat nderuch regime,hemonopolist illnot n-gagea privacyeekernprivateontracts.n the bsence f an externalechnology,theprivacyeekermightnitiallygree o use s* > s* andcollecthis orherx(.)butmightontinue o usehisorher * levelofservices rperhapsvenmisrepresentinformationetween *


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Table3.Results nder ifferentegulatoryegimesNoprivateontracts Private ontracts

No usage Regime 1 Regime 4enforcement Vendorwilloffer * Vendorwilloffer *Consumers will hoose: Consumers will hoose: Privacyseeker s* Privacyseeker s* Convenience seeker sj Convenience seeker(s;,-x(s))Usage Regime 2 Regime 3enforcement Vendorwilloffer * Vendorwilloffer *Consumers will hoose: Consumers will hoose: Privacy eeker Privacyseeker

min{sc, ;} (s;, x(sj) Convenience seeker s* Convenience seeker

NumericalllustrationForour nalysis, e assume simple ersonalizationechnologyunction(s) = sthats,at east ne service an be offeredor unit f nformationand considermonopolist hoseprofit-maximizingumber fservicess six thats,the atio fhisorher aluefornformationothe ost fprovidingervicess 12.All consumerswith utility-maximizingetof services elow ix areprivacyeekerswhere heirp4pratiosp/r [0, 12)and hosewith utility-maximizinget f ervices bove ixare onvenienceeekerswhere heir 4pratiosp/r 12.Figure shows he ptimalserviceevels nd orrespondingtilitiesndprofitsor he onsumerndmonopolist,respectively.t lso llustratesptimalncentivefee) hat he endor ill ffercharge)toprivacyeekersconvenienceeekers) nder egulatoryegimes and4.Figure shows hewelfare urve nder egimes ,2,and3 (regime has the amewelfares regime for rivacyeekersndregime for onvenienceeekers) orvarying4pratios. onsistentith he heoreticalrgumentsnbargainingresentedabove,we canseethatwelfarenderegime at eastweakly ominates elfareromanyother egime. owever, henwe compare egimes and2 wherenoprivatecontractsxistbuttheregulator'shoice s between llowance nddisallowanceoftechnology,e see that he elative aluationfthevendor's ostcoefficient)andthe oefficientf the onsumer'soncern or rivacyost r) comes nto lay.When hese wo ost oefficientsrethe ame, hewelfares the ame nboth ases;however, hen > r,then egime is worse ff han egime andvice versa. hisillustrationupportshe conomicntuitionhat ocietysbetter ffn anexchange,when he gentwith ower osts hooses heproductionr serviceevel. nregime1,consumerseterminehemarketffering,hile nregime , thevendor egainsmonopolyower nddetermineshemarketerviceevel.



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80 -- VS'>) j^S^


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-- - Regime3Regime2Regime 1or 12iy VendorParameters

(A) -> r= 0.5 (B) -> r= 1 (C) - r= 1.560 10

PrivacySeekers , " Convenience Seekers y

oi^ , , , , , , 50 , , , . ,0 2 4 6 8 10 12 14 14 1 18 20 22 24(A)0 180

eo PrivacySeekers >^ Convenience Seekers jr

r^-, : : : : : ; -) : : = : -(B)100 "I 250 -,

eo PrivacySeekers jr 23 Convenience Seekers f

0 - y< , . , , , JO/*^/ 2 4 0 6 10 12 14/ 70 -I . . , 1 , ,-20 -T ,2 14 16 18 20 22 24 26(C)

Figure . Welfare ffect nder ifferentegulatoryrameworks



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2 1 CHELLAPPA AND SHI VENDU

can ncentivizeheprivacyeeker ouse more erviceshan e or she would deallylike o use.However,he greed-uponetof servicessB s arrivedtbythevendor'sassessment f theprivacyeeker's oss. f thep4pratio s privatenformation,hentheprivacyeekerwill claim lower atio han is or her rue alue.From urnu-mericalllustrationnFigure , we can see the mount f ncentivess increasingwith ecreasing4pvalues.Similarly,he ervice evelunder egime is alwayshigherhan hepreferredevel for heprivacyeeker. ecause themarginaltilityfromersonalizationndthat romhe ransferood sthe ame, he onsumer illdeclare p4p p/r) uchthat hebargainederviceevelfrom henewp4pratio sthe ame s the onsumer'srueurplus-maximizingevel thats, ~B sc%nd husderives net tilityfvc(s*) x(i^ . Becausethe rivacyeekerwouldhave nywayconsumed * withoutny ncentives,hevendors now learlyworse ff. hus t snotoptimal or hevendor oengage n a privateontract henhe orshe does notknow heprivacyeeker's aluation. urfindingsarallel hat f Coase's theorem[11],which lso stresses hat hebargaining aynot ead to efficientutcomewhenvaluationsreprivateven f hepropertyightsrewelldefined.Along he ines fP3and imilaro he ehaviorfprivacyeekers,newould xpectthe onvenienceeekers lso to ie andpossibly eclare higher 4pratio uch hatthe endor ould ffer ore ervices han efore. owever,nlikehe symmetryna typical rincipal-agentetup,n our ontext,he nformationsymmetryoesnotbestow ny dvantageothe gent. he intuitionehind his ropositions that yaskinghe endor oprovideervices hat rehigherhan is rher rofit-maximizinglevel, he onvenienceeeker romisesonot nly ompensateor he endor'soss nprofitut lso share he emainingurplus ith hevendor.fthe onvenienceeekerdeclares p4pratio igherhan isorher rue alue, hen e or shewould ndeed etmore ervices han he ull-informationargainingolution,utheor hewould lsohave opaya higheree o thevendor.imilarly,f he onvenienceeeker eclaresa p4pvalue hat s lower han is or her rue alue, hen ven f he ee o bepaid sless, he esultingargainederviceevelwould lso be furtherwayfrom isorheridealpoint.Atthefull nformationervice evelunder egime ,themarginalainto the onsumer rommore ervicesthan *) equalsthemarginaloss tothevendorfromfferingervices reaterhan isorher rofit-maximizingevel.For declaredp4pratiohigherhan he rue alue, hemarginalainto the onsumers lessthanthemarginaloss tothevendor ndhence he onsumerannot ain nythingftercompensatinghevendor'soss.Fora declared 4pratio ower han he rue alue,themarginal ain othe onsumershigherhan hemarginaloss to thevendor ndthereforehe onsumerancompensatehe endor or ny oss and till ave n extrasurplusoshare. hisgain othe onsumerontinuesntilhe oint escribedy hefullnformationolution, here tequalsthemarginalossto thevendor.The mplicationfthe bove nalysess that venwhen hep4pratio snot om-monknowledge,he egulator ust llowfor hevendor ndconsumersoengagena privateontract. hile he endor nd hemarketondition illdeterminehetheror not uch contract illbepursued,hewelfare osocietywith heprovisionfprivateontracts alwaysgreaterhan requaltothe ocialwelfare hat elies nly



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10 i '9- 'Q Incentivesfor '0 declared p4p ft7 ' T6 - ' S ^

Service for ~ ~ ' ^ - - ~^^^^5 - truep4p ~ ~ ~', ^ - """" ^^^"^declaredj>4^^ ^^~-~^ c3Incentives"

for ^^^ ^^xIncentivesfor ^^^ '^truep4p ^^^ TC

^^^^ Declared p4p Trucp4p ^^^^^^^a--*^,,01 23456789 10 11 12

Figure . IncentivesndService evelsWhen Privacyeeker ies AboutHisp4pon thevendor's nforcementbilities.ndeed,we can observe hat heresults finformationsymmetryillbe similar o that fregime wherehevendor esignsprivateontractsor onvenienceeekerswhileprivacyeekers setheir espectivesurplus-maximizingervice evel.Discussions, imitations,ndFuture esearchOurr sear heval at s four girrehoiceshatregulatoraces n hemarketornfor-mation.hese egimesescribehedis)allowancef echnologieshatmay econsideredintrusiveswell s thedis)allowancef buying"nformation.emodel hesehoicesby examiningmonopolist'service fferingor marketefinedytwo onsumertypes privacynd onvenienceeekers.y nvestigatinghe trategicnteractionetweenconsumersnd hemonopolistndderivinghe ptimalervicefferings,e are ble ocomparehe rofits,onsumerurplus,nd ocialwelfare nder achregime.Ourformalizationf thepersonalization-privacyrade-offhroughhenonmono-tonic oncaveutilities nderlinesheno-free-disposalature f the service.The"free-of-charge"spect f this ervice ombinedwith ts"more-is-not-necessarily-better"haracterndows onsumers ith ertain nique bilities hat hallengeheconventionalisdom fmonopolymarkets. hile commonsensepproachmightsuggesthe eed ortrongegulationowardhe reventionf nformationcquisition,throughormal odeling, e show hatome ecommendationsn hismarket ay ecountero ntuition.onsideringhe aseswhere rivateontractsrenot easible,ndcomparingegimes and2,we seethat nder egime,when hemonopolistsabletoenforceervices sage,he orshegains ackhismonopolyower ndforces ometypesohave ero urplus.hus, rom consumer'soint fview, regulatorhoulddisallow heuse ofenforcementechnologiesfnoprivateontractsreoffered.



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On the ther and,we see thatwhen rivateontractsrefeasible uch s inregimes3 and4, it s theprivacyeekerwho sworse ffalthougho worse hannregime1)when nforcementechnologiesrenot llowed. his nterestingituationmergesdueto thefact hat endors illnot eektoengage heprivacyeekerswith rivatecontractsnless hey an be sure f a tangiblemannerhroughhich he greementcanbe enforced.hus ur esultsuggesthathe egulatorhould llow nforcementtechnologiesnly onditionalnprivateontracts.nsummary,he ocus f regulatorshould e ineducatinghe onsumersn their ropertyightsver nformationndensure hat ontractsrehonored n thepart fthevendor.Ourapproach inds upportnearly eportsn privacywhere ome researchershaveadvocated propertyightspproacho nformation.t has beenaskedof theinformationge as to"howcanwe live na societywhere ndividualsanhave smuch nformationrivacystheywant,ndyetwhere he conomic enefitsfusingpersonalnformationn commercereoptimized?"22].Thisreportuggestedhatmarketailurenprivacy-relatedarketsasoccurredecause f poor ocial hoicenthe llocation fpropertyights"22]. nthe bsence f ny ormal odelingxercisethat xaminesr ends redibilityo this heory,urresearchrovideshenecessaryframeworkoexamine he ocialwelfare ffectf llocationfpropertyightsnthecontextfonline rivacyndtechnologicaldvancements.ManagerialnsightsMany nline irmsre nvestingntechnologieselated othe cquisitionndminingof onsumers'referencendpersonalnformation.ecently,ahoo cquired vertureServices, hichs well-knownor ts contextualdvertising"seewww.overture.com).Thenaturalynergyetween he wo s due to the act hat ahoo cquires ustomerinformationndOvertureanmine his ustomernformationo onstructser rofilesandplace targeteddvertisements.ahoo offers any ifferentetsof serviceshata consumeranpersonalizenmy.yahoo.com,utmost onsumersseonly subsetof these ervices ndhenceprovidenformationnly or hose ervices.fYahoo'sbusinessmodel s built round certain mountf nformation,t couldrequiretsusers oconsume hatevel; or xample,t ouldrequirehat ll users hould t eastprovidenformationor heir eather,tock ortfolio,ndhoroscope.uch strategyon thepart fYahoo can be viableonly feitherll of ts onsumersindtoptimaltoprovidenformationor hese hree ervices r fYahoohad the bilityoensurethat onsumers ill ndeed se these ervices.WhileYahoocan useaccountxpira-tion ndotherechniqueso forcets onsumerso use a certainevel f ervices,heabundancefcompetitorshallengesheviabilityfthis trategy.Ourresultsuggest vendor hould ind nnovativeays hroughhich eorshecanprovideonsumers ithncentiveshatrerelated otheir se ofpersonalizationservices. irms uch s Amazon.comre xemplarsn this trategyndthey rovidevarious orms f ncentivesothe onsumerso use services hat renormallyotwithin heirptimalevel.Themost ommon orm sedby many endorss topro-vide oupons hatre ent hrough-mail nd onsumersavigatehroughseries f



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clicks oredeemhem. utotherechniques,uch s a "GoldBox" scheme,re lsoused that equireheuser o browse hroughstorenprescribedrder o avail ofdiscounts.irms lso enticeustomersoprovideheirriends/family-mail ddressesduringhippingnthe romisefprovidingrice iscountsotheirriendsnsimilaritems. mazon.comowhasa new chemewhere n nstanteward f157percent(calledn/2%yAmazon) fpurchasessprovidedfterdequate sageof tsA9.com(whichcquiresearchndbrowsingnformation)ervices. imilar oourdiscussionunder egimes and4,Amazon.comtates,How can we affordhis? Sponsoredlinks evenue from he mall ext-basedds onA9.com nd Amazon.com earchresultsages willhelp ffsetostswe ncurhroughhe nstant eward romotion.With ur utomatic /2%nstant eward, eareeffectivelyharing ith ou omeofthemoneywe collect romponsoredinks,.e. sharinghepi" (www.amazon.com/gp/sx/sharethepl.html).Our nalyses lsosuggesthat endors hould nvestn mechanismso earn boutconsumerarameterss it s key o the uccess fpersonalizationtrategies. hiletheresrelativelyittlecademic esearchnmeasuringersonalizationndprivacyrelationships,ecentmpiricalesearchrovidesomeguidance nmeasuringheseindividualpecificarameters8].Furthermore,he uccessof the ocially ptimal egime is dependent pon hetruthfulxecutionf theprivateontract;fthe onsumersrthevendor iolate hetermsf theirontract,hen he ocietywillbe worse ff. rom nimplementationperspective,he onsumer'shoices ndbargainingith he endor anbe facilitatedby uitably odifyingrivacyrotocolsuch s the latformor rivacyreferences(P3P) framework.hepotentialor uchbargainingrameworkssvery igh, s thepossible ange fpersonalizationndpotentialse of onsumernformations still nits nfancy.his sparticularlyruewithhe mergingieldsfgeneticndbiometrietechnology,here heres not nly hepotentialor ersonalizedrugs ut lso thepossibilityf erious rivacyiolations45].LimitationsndFuture esearchAsthe irst odel fpersonalizationn the resencefprivacyoncerns, edevelopour nalysiswith vendorndrepresentativeonsumerypes. orfutureesearch,twould e nterestingo xplore endortrategiesssumingdistributionf onsumertypes. urther,e explore monopolisticontext; duopolisticnalysismay hedmore ight nthe ompetitivespectsnthismarketnd wemaybe able to betteranalyze he trategyf a portal uch as Yahoovis--vis he ervice fferingsf acompetitoruch sMSN.References

1.Alba, .; ynch,.;Weitz,.;Janiszewski,; Lutz, .;Sawyer,.; ndWood,. nterac-tive omehopping:onsumer,etailer,ndmanufacturerncentivesoparticipaten lectronicmarketplaces.ournalfMarketing,1,3 1997), 8-53.2.Barua, ., ndChellappa,.K.Quasi-naturallyccurringxpenmentsith lectronic



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26. Mattila, . Consumers' alue udgment. ornellHotel & Restaurant dministrationQuarterly,0, 1 1999),40-46.27.Mittal, ., andLassar,W.M.Theroleofpersonalizationn service ncounters.ournalofRetailing,2,1 1996),95-109.28.Nash,J.F. hebargainingroblem.conometrica,8,2 (1950), 155-162.29.Noam, .M. Privacynd elf-regulation:arkets or lectronicrivacy.n W.M.Daleyand L. Irvingeds.), Privacy nd Self-Regulationn the nformation ge.Washington, C: U.S.DepartmentfCommerce,une 997 available twww.ntia.doc.ov/reports/privacy/selfregl.htm#lB).30.Peppers, ., andRogers,M. TheOneto One FutureOnetoOne).NewYork: urrency,1996.31.Osborne, .J.,ndRubinstein,.BargainingndMarkets. ewYork:Academic ress,1990.32.Peppers, .; Rogers,M.; andDorf, . Isyour ompanyeady or ne-to-one arketing?Harvard usiness eview, 7,1 1999),3-12.33.Pigou,A.C. TheEconomicsfWelfare.ondon:Macmillan, 932.34.Pine,B.J.,I; Peppers, .; andRogers,M. Do youwant okeepyour ustomersorever?Harvard usiness eview,3,2(1995), 103-114.35.Privacynline: air nformationracticesnthe lectronic arketplace.eporto Con-gress, ivision fFinancial ractices,ureau fConsumerrotection,ederal rade ommis-sion,Washington,C, 2000 available twww.ftc.gov/reports/privacy2000/privacy2000.pdf).36.Raghu, .S.; Kannan,.K.;Rao,H.R.; ndWhinston,.B.Dynamic rofilingf onsumersfor ustomizedfferingsver he nternet: model ndanalysis. ecision upportystems,32,2(2001), 117-134.37.Rendleman,.Customeratameansmoney.nformationWeekAugust 0,2001) avail-ableat www.informationweek.com/news/showrticlehtmlarticleID=6506304).38.Rogers, .L.Mailadvertisingndconsumerehavior.sychologyndMarketing,3,2(Winter996), 11-233.39.Rosenberg,. Privacys a matterf aste ndright.nE.F.Paul,F.D.Miller,ndJ.Paul(eds.),TheRightoPrivacy. ambridge: ambridge niversityress, 000,68-90.40.Scott, .S. rivacy,onfidential,nd ecurity:rotectingpersonallydentifiablenforma-tion." ealthcare inancialManagement,3,3 (1999),26-27.41. Shapiro,.P.The socialcontrolf mpersonalrust.merican ournalfSociology,3,3 (November987), 23-658.42. Sharton, ., andWilcoxson, .Privacy: he next rontiernonline egulation?ostonBar JournalMarch-April001),1-6.43. Sheehan, .B. Howpublic pinion ollsdefine nd circumscribenline rivacy.irstMonday, ,1 (2004) available thttp://firstmonday.org/issues/issue9_7/sheehan/index.html).44.Taylor, .R.Consumerrivacynd hemarketor ustomernformation.ANDJournalofEconomics, 5,4 (2004),631-651.45. Thatcher, .E., andClemons, .K. Managinghe ostsof nformationalrivacy:urebundlings a strategynthe ndividualealth nsurancemarket.ournalfManagementn-formationystems,7,2 (Fall2000),29-58.46.Thibodeau, . FTC workshopooks tkeydataprivacyssues.ComputerworldMarch13,2001) available twww.itworld.com/Man/2688/CW031301ftc/).47.Vidmar, ., ndFlaherty,.H. Concernor ersonal rivacyn n electronicge.JournalofCommunication,5,2 (Spring 985), 1-103.48.Volokh,.Freedomf peechnd nformationrivacy:he roublingmplicationsf righttostop eoplefrompeakingboutyou. tanfordawReview,2,5 (2000), 1049-1 24.49. Volokh, . Personalizationndprivacy. ommunicationsftheACM,43, 8 (2000),84-88.50.Wei,C.-P; Chiang,R.H.L.; andWu,C.-C.Accommodatingndividualreferencesnthe ategorizationfdocuments: personalizedlusteringpproach. ournalfManagementInformationystems,3,2 (Fall2006),173-201.51.Wind,J., ndRangaswamy,. Customerization:he secondrevolutionnmass cus-tomization.BusinessResearch enterWorking aperno.06-1999,PennStateUniversity,Universityark, 001.



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AppendixProof fLemma1We havevv(s) ag(s) - s2 ndvc(s) ps- rg's). s* is the olutionothe quationvc' 0 thats,g(s*)g'(s*)-pllr. Becauseg is strictlyonvex nd ncreasing,andg' are bothncreasingn s and hence * is increasingnplr.vc(s) ps^ - rg's)=0 => (plr)s g2(s).Differentiatingoth ideswith especto w.r.t.)lr,weget

8 sBecause sc s* and 2g(sc*)g'(sc*)p/r,2g(sc)gf(sc)p/r. Hence 5sc/8(p/r) 0.Proof fLemmaBydefinition,or he rivacyeeker,*< s*,andfor he onvenienceeeker,* > s*.Inthe resencefenforcementapabilities,nly onsumers'articipationonstraintneeds o besatisfied,hereasn the bsence fenforcementbilities,he onsumerscan useany erviceevel qualto or belowthat fferedythevendor.nthepres-enceofenforcement,or heprivacyeeker,fvc(s*)> 0,then hevendorwilloffers*; however,fvc(s*) 0,thenhe endor illofferhe ervice evel losest ohisorher urplus-maximizingevel, uch hat heprivacyeeker's articipationonstraintis met that s,theprivacyeeker ets eroutility.ecausethevendor's rofitsincreasingt service evels essthansj' he or shewillofferst,wherevc0c) 0. Forthe onvenienceeeker, c(s*) 0 andv'c(s*) 0,hence hevendor illoffer*.Also, nthe bsence fenforcement,hevendorwilloffer* to the onvenienceseeker she or hewillfindtoptimalouse this erviceevel rrespectivef xternalenforcement.owever,heprivacyeekerwill use s* < min{sc,s*}yf thevendoroffersmin{5c,5*}.ence hevendor illoffernly *.Proof fPropositionBydefinition,c* sj for onvenienceeekers. ecause 5vv(s*))/8s0 for ny >sv'thevendor illonly hoose * irrespectivefthe bilityoenforce. owever,heeffectfenforcementwhen * is chosen) ndnonenforcementwhen * ischosen)onthewelfarefthe ociety ecomesmbiguous hen hemarket as someprivacyseekers thats,vjis*) snot lways reaterhanvw(s*)rviceversa. et us assumethat or given et ofvendor arametersa, ) and a given rivacyoefficientr),



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theres someconsumerype orwhomvw(s*) vw(s*).Weneedtoprove hat orthese iven arameters,here re other onsumerypes orwhom he quality oesnothold.Fora fixed alueof r andchangingalues fp, thedirectionf the ight-hand ide thats,6vH(s*)/dps* is constantndpositive. owever,he irectionofthe eft-handide s ambiguous.

andbecause rg'(s*)g(s) p,we have

-^ =sc+^(ag'(sc)-2fisc).(6vw(s*))/8pspositivef

,-(,)-*; -|^and8vw(s*)/8psnegativef

*:


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Proof fLemma andCorollaryWedevelop n axiomatic argainingroblem here oth hevendornd he rivacyseeker ave he amepreferencesverv., = {v,c} as the tilityromersonalizationto he onsumernd he rofitromersonalizationor he endorre ransferablendhave ne-to-onequivalence.ence0, d) is a symmetricargainingroblem.or uchproblems,heNash olutionsobtainedirectlyromYM andPARconditions31].Theunique ymmetricfficienttility,rofitairwillbe obtainedt the ointwherethe endornd he onsumer ivide he ieBn(sB)nequalparts. ecause ll ofBn(sB)is initially ade vailable othevendor,e or shewilloffer totalncentivef

( A_vc(Jg) + vv(Jn)-Vc(Jc)-Vv(Jc)1'SB)-

-to theprivacyeekers.sB s determinedythe olutiono theproblemosed n Lemma . DifferentiatingBnwith espectos,weget

8s s 6sasvc(s*) ndvv(s*)re onstant.his snothingtherhan he irstrder f hewelfare-maximizationroblemfvw(.) vv(.) vc(.).Hence he erviceevelfromargainingisequalto thewelfare-maximizingerviceevelsB= sh*.The convenienceeeker's ase is the onverse f theprivacyeeker'snthat heconvenienceeeker refers ore erviceshan hevendor'sptimalevel. nthe ar-gainingetup,he onvenienceeeker illnot nly ompensatehe endororhe ostofofferingervicesnexcess f he endor'sptimalevelbut he onvenienceeekerwill lsopay nadditionalhargehat sproportionalothe ain n hisorher tility.If weapply hebargainingrameworko this egimes well,we wouldgetx as theoptimal rice hat hevendor illbewillingoaccept.Hencewe haveCorollaryProof fPropositionIn the bsenceofenforcement,hevendor's rofits v (>*);with nforcementndprivateontractsregime ),net rofitromersonalizations

i v , v , v vsb)+ vv{sb)-vc(s*c)-vv(s*c)^ 2

We know hatvc(s*) vc(sB) 0 andvv(sB) vv(s*),o vv(sB) vv(s*) 2vv(s*). hisimplies v(sB) %(sB) vv(s*),nd hence he roducer elfares alwayshigherur-ingregime . Under egime ,theprivacyeekerwouldhavereceivedv.(5r*),nd nregime ,he orshereceivesvc(sB) x(sB). ecausex(sB) vc(s*) vt{sB)theprivacy



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seeker eing ompensatedorhisorher oss),wehavevc(sB) x(sB) vc(s*).Hencethe rivacyeekers alsoalways etterff uringegime.Thus,weseethe greed-upon erviceevelsB= s* from emma ,hencevJ^sB) vj^s*) regime > regime1)andvM,(s)vj^s*) regime > regime). Ifonly rivateontractsre llowed ndenforcements notregime),we know hat he rivacyeekerwill nly etv{s*) andthevendor illonly etvv(s*) soboth he rivacyeekernd hevendor reworseoffwith egardo theirxchange. he contractsetween he onvenienceeeker ndthevendor illbethe amebetweenegimes and4.Proof fPropositionLetthep4pratioplr)be given ysome 8 e [6,0], with cumulative istributionF(0) and a densityunction(0) > 0 on [0,0]. Let thevendor's arameters andbecommon nowledgendhe or sheknows nly hedistributionfthe onsumer'sp4pratio.n the vent fengagingnprivateontracts,hevendorwouldpaya nettransferf

,, (v,(^(e))-vv(,;(e)))+(vc(,;(e))-vc(^(e)))*(0), = 2tothe onsumer.ow,f he onsumernnouncesisorher 4pratio obesome=0 - A0, henhe ransfereceived illbe,aMM)KM^('.(*()H(-.()))x(0)a .

For theprivacyeekers,tthebargainingolution oint B,dvv(sB(Q))/ds0 anddx(Q)/ds 0. Ifa consumerf0 announces then henewbargainingolutionssB sB.Because he aluevc sincreasingpto *,the onsumer ill ower isorherp4pratio othatsB s*.While he ransferoodx continueso ncreasewith mallervalues f6, ying elow B s*,vf egins o decrease nd,hence, rom his oint n-ward,nydecision odeclare lowerwilldepend n the rade-offetweenhe ossin consumerurplusndgain n the ransferood.Therefore,he rivacyeekerwillalways ie at eastupto a p4pratio such hathe argainederviceevelsB s*.From hevendor's oint fview, he onsumer ill never ontractservice evelgreaterhan *. Evenwithoutargaining,his s the erviceevel hat he onsumerwouldhave hosen, ndthevendorwouldnothavehad topayany ransferoodaswell.Hence,f yingantake lace, he endor illneverngagenprivateontractswithhe rivacyeeker. owever,ecause he onvenienceeekerspaying feeforserviceshat reprovidedbove hevendor's rofit-maximizingevel, nd s the eex(sB)'sB s* is increasingn s and as sB s increasingnthep4pratio,he onsumerwillnever e betterff ydeclaring p4pratiohigherhanhisor her rue alue.Similarly,f he onsumereclares lower 4pratio,henhe ee he onsumer ouldneed opay s lessbuthe orshewill lsoget serviceevel hat s fartherrom is

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