Personalized Pricing in the Presence of Privacy Concerns

We study firms’ incentives to adopt a tracking technology to collect personal data that enable personalized pricing in an online market where some consumers have innate desires for privacy. In a model where two differentiated goods are sold under two different market structures (monopoly and duopoly), we find that the presence of these privacy-sensitive consumers alters the firms’ incentive to adopt personalized pricing. In particular, no firm uses personalized pricing in equilibrium if the proportion of privacy-sensitive consumers in the market is high. Competition, however, leads to wider use of personalized pricing. Privacy regulation that gives consumers control over whether a firm can track their online activities has the intended impact of protecting consumer privacy only if the proportion of privacy-sensitive consumers is low. Otherwise, the regulation makes the use of tracking technology more widespread. A key force that drives these results is the inability of a monopolist to commit to personalized prices that will give privacy-sensitive consumers a nonnegative net surplus. This deters these consumers from purchasing from the firm. If the proportion of privacy-sensitive consumers is high, the risk of losing these consumers induces the monopolist to adopt uniform pricing. Under duopoly, competition between firms alleviates the impact of the commitment problem because the rivals undercut each other’s prices. Privacy regulation also mitigates this impact because a firm can credibly commit to offering a uniform price to those consumers who reject tracking. Consequently, both competition and privacy regulation lead to increased use of tracking technology. This paper was accepted by Raphael Thomadsen, marketing. Funding: Z. Chen acknowledges financial support from the Social Sciences and Humanities Research Council of Canada [Grant 435-2019-0866]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2024.07170 .