Price Increases from Online Privacy

TL;DR

This paper develops a framework to quantify the benefits consumers gain from targeted online marketing, focusing on price reductions due to more efficient marketing, amidst privacy concerns and policy debates.

Contribution

It introduces a model to measure the consumer value of price reductions from targeted marketing, addressing the gap in empirical evidence on privacy valuation.

Findings

Targeted marketing can lower consumer prices.

Consumers value privacy but also benefit from better-targeted offers.

The model estimates price reduction benefits attributable to improved marketing efficiency.

Abstract

Consumers value keeping some information about them private from potential marketers. E-commerce dramatically increases the potential for marketers to accumulate otherwise private information about potential customers. Online marketers claim that this information enables them to better market their products. Policy makers are currently drafting rules to regulate the way in which these marketers can collect, store, and share this information. However, there is little evidence yet either of consumers' valuation of their privacy or of the benefits they might reap through better target marketing. We provide a framework for measuring a portion of the benefits from allowing marketers to make better use of consumer information. Target marketing is likely to reduce consumer search costs, improve consumer product selection decisions, and lower the marketing costs of goods sold. Our model allows us to estimate the value to consumers of only the latter, price reductions from more efficient marketing.