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by Dina Gerdeman
Consumers are increasingly wary
about sharing personal information
with firms. Yet when they benefit
from providing information in
exchange for lower prices or better
services, many consumers will
gladly make the privacy trade-off.
But how does this disclosure of
personal information affect
competition among firms?
In the working paper Competing
with Privacy, Ramon
Casadesus-Masanell and Andrs
Hervs-Drane "consider a market
where firms set prices and
disclosure levels for consumer
information, and consumers
observe both before deciding
which firm to patronize and how
much personal information to
provide."
"Focusing on a single
revenue source is the most
profitable strategy when
firms compete for
consumer information"
It's clear from their research that
the marketplace has plenty of room
for two types of Internet firms:
those that ask consumers to
disclose a large variety of personal
datain some cases in exchange
for free services or lower
pricesas well as firms that
pledge to keep a lid on people's
information, but often charge
consumers higher prices.
Firms competing with privacy tend
to benefit from engaging in
different degrees of information
disclosure as they cater to the
needs of different consumer
groups. Casadesus-Masanell, the
Herman C. Krannert Professor of
Business Administration at
Harvard Business School, and
Hervs-Drane, assistant professor
at Universitat Pompeu Fabra in
Barcelona, found that competition
has three main effects on the
marketplace:
1. Competition drives the supply of
services with a low level of
disclosure, since some customers
will choose to pay more for a
Casadesus-Masanell and
Hervs-Drane provide additional
details about their research in the
Q&A below. They collaborated in
answering the following questions
for Working Knowledge via email.
Q: It appears that consumers are
often willing to provide
information to firms, not only
because they may receive lower
prices in return but also because, in
some cases,firms provide better
service.
A: There are many examples of
how firms exploit consumer
personal information to improve
online services. Retailers and travel
agencies, for instance, use
information about consumers' likes
and dislikes to improve their
automated product
recommendations. These
recommendations are often
presented as ''inspired by your
browsing history'' or
''recommended for you,'' and help
consumers discover new products
or holiday packages that match
their tastes. Similarly, online
services such as Microsoft's Office
365 learn from consumer usage
patterns and documents,
personalizing their user interfaces
by selecting which quick-access
functions to display and
incorporating new words and
expressions into their correction
dictionaries. Moreover, some
online services rely heavily on the
exploitation of consumer
information. Social networking on
Facebook would be of little value if
users provided no personal
information, and digital assistants
such as Apple's Siri require access
to consumers' location, contact
lists, and calendar to be helpful.