We Value Your Privacy: Behavior‐Based Pricing Under Endogenous Privacy

ABSTRACT We study a duopoly model of behavior‐based pricing in which consumers can either disclose or hide their data. We contrast two data policies. Under an open data policy, disclosed data is shared with all firms. In the unique equilibrium, all consumers disclose, and firms price discriminate, leading to welfare losses from inefficient poaching. Under an exclusive data policy, disclosed data is accessible only to the firm from which a consumer previously purchased. In the unique equilibrium, all consumers hide, prices are uniform, and the market is efficient. We test these contrasting predictions in an experiment. Under the open data treatment, subjects predominantly act as predicted but do not fully disclose. Under the exclusive data treatment, buyers initially excessively disclose as sellers reward loyalty, but shift toward hiding as sellers begin employing poaching strategies. The discrepancy between theoretical and observed privacy choices can be explained by the presence of consumers who, irrespective of the data policy, are committed to either disclosing or hiding their data.