Consumers’ Privacy Concerns and Price Setting in a Multichannel Monopoly

This paper presents a dynamic model of multichannel price setting under market signaling and learning. The paper explores the case of a monopolist selling a good through two buying channels: brick-and-mortar and online. A novel feature of the paper is to introduce an idiosyncratic privacy concern for consumers buying in the online market. This concern is unknown to them when they make their purchase in the first period. Another novel mechanism is the use of the idea that firms have better information about consumers’ average privacy concerns than consumers themselves and that they signal this information to consumers via prices. Specifically, the monopolist receives a noise signal about consumers’ average privacy concerns, which allows it to adjust the price in both sales channels. The consumers’ inference from second-period prices, together with their experience from first-period purchases, will determine their second-period demand. The paper shows how a multichannel monopolist sets prices and uses them to signal its private information to consumers. This strategy enables the firm to discriminate between prices in these two buying channels and ensure consumers’ maximum willingness to pay. Moreover, given consumers’ varying privacy concerns, we propose population-average privacy concerns as the reason for multichannel market price dispersion