Private Demands and Demands for Privacy: Dynamic Pricing and the Market for Customer Information

Consumer privacy and the market for customer information in electronic retailing are investigated. The value of customer information derives from the ability of firms to identify individual consumers and charge them personalized prices. Two settings are studied, a closed privacy regime in which sale of customer information is forbidden and an open privacy regime in which it is permitted. Consumers fare poorly and firms fare well under an open privacy regime when consumers are myopic. In such settings the opportunity to sell information often gives firms incentives to charge 'experimental' prices. When consumers are farsighted relative to firms, however, they may undermine the market for customer information by strategically rejecting offers. In this case, firms are always better off committing to keep customer information private.