An Economic Analysis of User-Privacy Options in Ad-Supported Services

TL;DR

This paper examines the economic implications of offering privacy options in ad-supported services, analyzing when site operators benefit from low-cost privacy features and how competition influences privacy offerings and revenues.

Contribution

It provides a theoretical framework for understanding the conditions under which privacy options are economically advantageous for site operators and explores competitive dynamics leading to a Prisoner's Dilemma.

Findings

Low privacy costs benefit operators when privacy-sensitive users are sufficiently valuable.

Competitive markets can lead to suboptimal privacy offerings due to a Prisoner's Dilemma.

Offering minimal privacy costs can reduce revenue in competitive environments.

Abstract

We analyze the value to e-commerce website operators of offering privacy options to users, e.g., of allowing users to opt out of ad targeting. In particular, we assume that site operators have some control over the cost that a privacy option imposes on users and ask when it is to their advantage to make such costs low. We consider both the case of a single site and the case of multiple sites that compete both for users who value privacy highly and for users who value it less. One of our main results in the case of a single site is that, under normally distributed utilities, if a privacy-sensitive user is worth at least $\sqrt{2} - 1$ times as much to advertisers as a privacy-insensitive user, the site operator should strive to make the cost of a privacy option as low as possible. In the case of multiple sites, we show how a Prisoner's-Dilemma situation can arise: In the equilibrium in which both sites are obliged to offer a privacy option at minimal cost, both sites obtain lower revenue than they would if they colluded and neither offered a privacy option.