Abstract: Recent technological progress has led to the rise of big data. The availability of new datasets and search technologies enables sellers to approximate perfect price discrimination, charging every consumer individualized prices. Many consumers feel overwhelmed by the threats to their privacy and its economic consequences and face cognitive constraints when deciding about consumption and the disclosure of their personal data. We construct a model where consumers face the trade-off between using a sales channel that quickly leads them to their preferred product but collects and uses all personal data, leaving them no surplus from consumption. Alternatively, they can search anonymously, for a cost. Consumers do not fully anticipate a seller's strategic response to increase the price on the anonymous channel, which leads to some consumers ending up with negative, others with positive surplus, thereby endogenizing preferences for privacy. We demonstrate that the anonymous channel breaks down if consumers are too sophisticated and discuss different interpretations and resulting policy measures.

Download the paper