An economic model of portal competition under privacy concerns

ABSTRACT

Due to inherent privacy concerns, online personalization services such as those offered through toolbars and desktop widgets are characterized by "no-free-disposal" (NFD) property, in that more services are not necessarily better for the consumer. There are two defining characteristics of this market: First, these services are "free" as firms value consumers' preference information shared for personalization; second, while some firms provide toolbars of a fixed-length as a take-it or leave-it offer, many others offer consumers the option of choosing a subset of the services offered. Our findings suggest that in a fixed-services duopoly where firms are endowed with sufficiently different marginal values for information (MVIs), the high MVI firm caters to convenience seekers in the market while the low MVI firm serves a portion of largely privacy seeking consumers in equilibrium; if the duopoly were characterized by sufficiently high MVIs, firms would minimize differentiation and offer the same number of services. However, when two high-MVI firms pursue variable-services strategy, there is a unique symmetric equilibrium that maximizes consumer surplus. Counter to intuition, some very high-MVI firms may prefer the consumer-surplus maximizing strategy of offering the full set of variable services over the fixed-services strategy, thus maximizing both consumer and social welfares. Our results lead to important managerial and policy implications and interesting extensions to the existing location models.

REFERENCES

• 1: Anonymous. 2001. HIPPA Privacy Rule Takes Effect. Healthcare Financial Management. 55(6) 9.
• 2: Baye, M. R., G. Tian and J. Zhou. 1993. Characterizations of the Existence of Equilibria in Games with Discontinuous and Non-quasiconcave Payoffs. Review of Economic Studies. 60 935--948.
• 3: Bloom, P. N., G. R. Milne and R. Adler. 1994. Avoiding Misuse of New Information Technologies: Legal and Societal Considerations. Journal of Marketing. 58(1) 98--110.
• 4: Chellappa, R. K. and S. Shivendu. 2006. Online Personalization and Privacy Concerns: An Axiomatic Bargaining Approach. Journal of Information Technology and Management. 7(1) 7--19.
• 5: Ramnath K. Chellappa , Raymond G. Sin, Personalization versus Privacy: An Empirical Examination of the Online Consumer's Dilemma, Information Technology and Management, v.6 n.2-3, p.181-202, April 2005 [doi>10.1007/s10799-005-5879-y]
• 6: Pei-Yu (Sharon) Chen , Lorin M. Hitt, Measuring Switching Costs and the Determinants of Customer Retention in Internet-Enabled Businesses: A Study of the Online Brokerage Industry, Information Systems Research, v.13 n.3, p.255-274, September 2002 [doi>10.1287/isre.13.3.255.78]
• 7: Culnan, M. J. and R. J. Bies. 2003. Consumer Privacy: Balancing Economic and Justice Considerations. Journal of Social Issues. 59(2) 104--115.
• 8: D'Aspremont, C., J. J. Gabszewicz and J.-F. Thisse. 1979. On Hotelling's "Stability in Competition". Econometrica. 47(5) 1145--1150.
• 9: Dasgupta, P. and E. Maskin. 1986. The Existence of Equilibrium in Discontinuous Economic Games, I: Theory. Review of Economic Studies. 53(1) 1--26.
• 10: Derlega, V., S. Metts, S. Petronio and S. Margulis. 1993. Self-Disclosure. Sage, Newbury Park, CA.
• 11: FTC. 2004. Monitoring Software on Your Pc: Spyware, Adware, and Other Software. Federal Trade Commission Workshop #110. Project P044509 Washington DC.
• 12: Gabszewicz, J. J. and J.-F. Thisse. 1992. Location. Handbook of Game Theory. R. J. Aumann and S. Hart. Elsevier Science Publishers. 1: 281--304.
• 13: Hadfield, G. K. 1991. Credible Spatial Preemption through Franchising. The RAND Journal of Economics. 22(4) 531--543.
• 14: Francisco Facchinei , Stefano Lucidi , Ganesh Iyer, Coordinating Channels Under Price and Nonprice Competition, Marketing Science, v.17 n.4, p.338-355, April 1998 [doi>10.1287/mksc.17.4.338]
• 15: Milgrom, P. and J. Roberts. 1994. Comparing Equilibria. American Economic Review. 84(3) 441--459.
• 16: Moorthy, K. S. 1988. Product and Price Competition in a Duopoly. Marketing Science. 7(2) 141--156.
• 17: B. P. S. Murthi , Sumit Sarkar, The Role of the Management Sciences in Research on Personalization, Management Science, v.49 n.10, p.1344-1362, October 2003 [doi>10.1287/mnsc.49.10.1344.17313]
• 18: Nahata, B., S. Kokovin and E. Zhelobodko. 2003. Package Sizes, Tariffs, Quantity Discount and Premium. Economics Working Paper Archive at WUSTL 35.
• 19: Raghu, T. S., P. K. Kannan, H. R. Rao and A. B. Whinston. 2001. Dynamic Profiling of Consumers for Customized Offerings Over the Internet: A Model and Analysis. Decision Support Systems. 32(2) 117--134.
• 20: Scott, J. S. 1999. Privacy, Confidential, and Security: Protecting "Personally Identifiable Information". Healthcare Financial Management. 53(3) 26--27.
• 21: Shankar, V., A. K. Smith and A. Rangaswamy. 2002. Customer Satisfaction and Loyalty in Online and Offline Environments. Working Paper.
• 22: Stone, B. 2005. Uneasy Rider: Ask Jeeves didn't ask before installing a search tool on millions of Web browsers. Now investors are asking questions. Newsweek. June 03, MSNBC Web exclusive.
• 23: Arun Sundararajan, Nonlinear Pricing of Information Goods, Management Science, v.50 n.12, p.1660-1673, December 2004 [doi>10.1287/mnsc.1040.0291]
• 24: Winer, R. S. 2001. A Framework for Customer Relationship Management. California Management Review. 43(4) 89--105.

INDEX TERMS

Primary Classification:
  K. Computing Milieux
  K.6 MANAGEMENT OF COMPUTING AND INFORMATION SYSTEMS
      K.6.0 General
          Subjects: Economics

General Terms:
Economics, Legal Aspects, Management, Theory

Keywords:
nash-equilibrium, personalization, privacy, spatial competition, welfare analysis