26 september: R Montes Moreno thesis

In the first chapter we investigate the effects of price discrimination on prices, profits, and consumer surplus when (a) at least one competing firm can use consumers’ private information to price discriminate yet (b) consumers can prevent such use by paying a “privacy cost”. Unlike a monopolist, competing duopolists do not always benefit from a higher privacy cost because each firm’s profit decreases—and consumer surplus increases—with that cost. Under such competition, the optimal strategy for an owner of consumer data is selling to only one firm, thereby maximizing the stakes for rival buyers. The resulting inefficiencies imply that policy makers should devote more attention to discouraging exclusivity deals and less to ensuring that consumers can easily protect their privacy.

The second chapter studies the interplay of advertising and price discrimination in online markets and their interactions with consumers’ privacy. I consider a situation where a monopolist has access to an endogenously determined set of consumer data and consumers can acquire privacy at a cost. The firm sends targeted ads and perfect price-discriminates consumers it has data about and uses mass advertising to promote its product in the rest of the market. I show that costly mass advertising makes consumers’ privacy behavior more sensitive to the privacy cost. I provide extensions to the model to analyze product customization and costly targeted advertising and find none of which affect consumer surplus. However, the former may increase profits, while the latter may reverse the relationship between profits and the cost of privacy.

In the last chapter we study how product customization and consumer privacy affect a monopolist’s incentives to engage in perfect price discrimination. We consider a monopolist that can access consumer data to price discriminate and to customize products through analytics. In turn, consumers can protect their privacy to avoid price discrimination at a cost. We found that the monopolist only price-discriminates when the value added trough analytics is sufficiently low.