A Theory of the Effects of Privacy

The growth of information technologies has intensified concerns about individual privacy and highlighted the importance of consumer privacy rights. At the same time, these technologies enable significant personalization of communications and offerings. We develop a theory of the effects of privacy based on the concavity of an individual’s derived payoff function with respect to market beliefs: When this function is concave, privacy is valuable. We identify market conditions that lead to concavity or convexity in the derived payoff function. The framework is applied to contexts such as product choice, price discrimination, data breaches, and health insurance. This paper was accepted by Raphael Thomadsen, marketing. Funding: A. Bonatti acknowledges financial support through the National Science Foundation [Grant SES-1948692]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2024.05354 .