Customer Data Privacy, Competition and Firm Performance

Customer data offers monetization opportunities but also entails potential risks for many businesses because of customer privacy concerns. Despite the increasing importance of these trade offs, there is limited research of their impact on businesses. To address this gap, we develop a theoretical model which predicts the performance of firms with different privacy strategies. Specifically, higher customer privacy reduces firm's operating profitability but mitigates litigation-related risks. The model also posits that stronger product market competition incentivizes firms to increase data privacy, by rendering litigation-related costs harder to bear. Using a novel measure of customer data privacy performance, we offer empirical support for our theoretical model predictions. The findings suggest that a market-based mechanism to promote customer data privacy is feasible