What Should a Firm Know? Protecting Consumers’ Privacy Rents

Abstract

A monopolistic firm observes a signal about the state of the world and then makes a take-it-or-leave-it offer to an uninformed consumer who has recourse to some outside option. We provide a geometric characterization of the firm’s information structure that maximizes the consumer’s surplus: the optimal regime partitions the space of payoff states into polyhedral cones with disjoint interiors. We interpret our results in terms of the maximization of the consumer’s “privacy rent.” We illustrate and motivate our approach through the example of the regulation of the privacy of medical information in monopolistic health insurance markets. (JEL D21, D42, D83, G22, I13)