An Economic Analysis of Digital Privacy

Abstract

This paper develops a new theoretical model to analyze the benefits and costs associated with consumer data acquisition. While data collection yields benefits for consumers and generates revenue for digital platforms, it also imposes privacy costs on consumers. These privacy costs increase with consumers' privacy sensitivity and the scale of data collected. We identify a market failure inherent in the prevailing business models for data collection, characterize efficient pricing mechanisms under various business models and market conditions, and offer policy recommendations for digital privacy regulation.