Consumers’ Strategic Misrepresentation Under Data-Driven Personalization: A Game-Theoretic Analysis of Pricing, Consumer Information Collection and Welfare

The collection and application of consumer information raise privacy concerns. Consumers may misrepresent their personal information, which may mitigate their privacy concerns. False information presents paradoxes for both firms and consumers. Hence, firms need to adjust their pricing strategies considering consumer misrepresentation. This paper employs a three-stage theoretical model to examine the impact of consumer misrepresentation on the firm and consumers at the same information-collection intensity. The results show that strategic misrepresentation always increases the equilibrium price, while its effects on demand, firm profit, consumer surplus, and social welfare depend on the unit profit of true personal information and the proportion of privacy-sensitive consumers. Under specific conditions, strategic misrepresentation generates a firm–consumer win–win outcome with higher social welfare. Privacy-sensitive consumers truthfully disclose their personal information below a behavioral threshold and begin to misrepresent above it. The firm’s optimal information-collection intensity may lie below, at, or above the behavioral threshold, depending on the unit profit of true personal information, the unit information-processing cost, and the reduction in disclosure accuracy. We contribute to the literature on information systems and data strategy by revealing how strategic consumer falsification reshapes firm decision-making and welfare in data-driven markets.