Abstract
Recent progress in information technologies provides sellers with detailed knowledge about consumers' preferences, approaching perfect price discrimination in the limit. We construct a model where consumers with less strategic sophistication than the seller's pricing algorithm face a trade-off when buying. They choose between a direct, transaction cost-free sales channel and a privacy-protecting, but costly, anonymous channel. We show that the anonymous channel is used even in the absence of an explicit taste for privacy if consumers are not too strategically sophisticated. This provides a micro-foundation for consumers' privacy choices. Some consumers benefit but others suffer from their anonymization.
Highlights
Two recent technological developments are revolutionizing seller-buyer transactions
We construct a model where consumers with less strategic sophistication than the seller’s pricing algorithm face a trade-off when buying. They choose between a direct, transaction cost-free sales channel and a privacy-protecting, but costly, anonymous channel
We show that the anonymous channel is used even in the absence of an explicit taste for privacy if consumers are not too strategically sophisticated
Summary
Stage 3 – Buying: A utility-maximizing consumer buys the good if the price she has to pay does not exceed her valuation, i.e. if, and only if, v ≥ p ∈ {pi(v), pA}. With limited strategic sophistication such discrepancy is possible This is due to the fact that s will be a sunk cost for consumers at Stage 3, which the seller can exploit via increasing the price by exactly s, compared to their expectations. We determine these recursively and will start with consumers with sophistication k = 0, which are referred to as “naıve” consumers: they naıvely expect the monopolist to engage in regular monopoly pricing in channel A, i.e. E0(pA) = pM .13 Thereby, they ignore the fact that the very choice of channel A might be signaling a high valuation to the seller. Lemma 3 shows that naıve consumers in channel A pay a premium of s as compared to their expectations (p∗A0 − E0(pA) = s) They do not anticipate that the seller can infer that only consumers with a valuation of at least pM + s choose the anonymous channel. All solutions feature the same behavior, where no consumer anonymizes and the seller charges individualized prices p∗i (v) to all
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