Consumers' Privacy Choice and Big Data

Résumé

Perfect price discrimination has long been marginalized as a mere theoretical construct with the argument that no encompassing dataset exists as to perfectly anticipate every consumer’s willingness to pay. Recent trends in information technology, commonly referred to as “Big Data”, however, paired with the increasing personalization of products and services render this argument less valid every day. This paper examines the effects of these trends when consumers have the (costly) option to anonymize and hide characteristics that would reveal their willingness to pay. Deviating from the theory of perfectly rational consumers we analyze how different levels of strategic reasoning, so-called level k thinking, further change the anonymization choice and consequently the pricing decision of a monopolistic seller. More precisely, we will assume that consumers have a finite level of higher strategic sophistication and that the sellers’ level is higher (which is equivalent to assume perfect rationality for the seller).