Privacy, Customization, and Cross-Selling of Information

Abstract

An unavoidable aspect of electronic commerce is the collection of personal information. Although personal information is paramount to improving services and designing personalized offerings, its collection and use also generates privacy concerns. This study analytically examines the optimal information collection and usage practices in the presence of privacy costs. We use an analytical model in which a firm makes decisions on pricing, level of information collection and customization, and the extent of cross-selling. We find that cross-selling opportunities create value for consumers and sellers since consumer surplus and total profits may both increase with cross-selling. Advances in information technology motivate cross-selling and provide more incentives for the firms to engage in cross-selling. Consequently, firms are better off when cross-selling while offering customized products even in the presence of privacy costs. We find that serving a niche market and limiting the demand is a winning strategy when consumers' value for customization increases. On the other hand, an increase in the profitability of cross-selling favors a mass market strategy in which a firm serves a broader range of customers. Interestingly, cross-selling strategies may lower prices and provide significant strategic advantages with increased customer satisfaction while reaching a broader market. Total surplus increases at a decreasing rate as the amount of information collection and the extent of cross-selling increase. A niche marketing strategy facilitated by improvements in customization technology increases both consumer and total surplus.