Data Trade and Consumer Privacy

TL;DR

This paper analyzes optimal data collection and trading mechanisms, revealing that data trade regulation impacts social welfare and that controlling market power is more effective than restricting data sharing.

Contribution

It characterizes the optimal mechanism for data trading under incentive constraints and compares the effects of data trade bans versus market power regulation on welfare.

Findings

Selling full information is optimal in highly differentiated data markets.

Banning data trade can reduce social welfare by hindering price discrimination.

Regulating market power is more effective for privacy than restricting data sharing.

Abstract

This paper studies optimal mechanisms for collecting and trading data. Consumers benefit from revealing information about their tastes to a service provider because this improves the service. However, the information is also valuable to a third party as it may extract more revenue from the consumer in another market called the product market. The paper characterizes the constrained optimal mechanism for the service provider subject to incentive feasibility. It is shown that although the service provider sometimes sells no information or only partial information in order to preserve profits in the service market, selling full information is optimal when the data-sourcing market is highly differentiated. Moreover, a ban on data trade may reduce social welfare because it makes it harder to price discriminate in the product market. Instead, reducing the intermediary's bargaining power can protect privacy without hurting social welfare, which suggests that the regulation of market power is more efficient than the regulation of data sharing.