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Online privacy and information disclosure by consumers*

Apr 2018
Working Paper
18-008
By  Shota Ichihashi
I study the question of what information consumers should disclose to firms. A consumer discloses information to a multi-product firm, which learns about his preferences, sets prices, and makes product recommendations. While the consumer benefits from disclosure as it enables the firm to make accurate recommendations, the firm may use the information to price discriminate. I show three main results. First, the firm prefers to commit to not price discriminate, which encourages the consumer to provide information that is useful for product recommendations. This result provides a new rationale for firms not to engage in price discrimination. Second, nondiscriminatory pricing hurts the consumer, who would be better off by precommitting to withhold some information. This provides a rationale for privacy regulations that limit the amount of personal data that firms can possess. Third, in contrast to single-product models, equilibrium is typically inefficient even if the consumer can disclose any information about his preferences.