Privacy regulation in asymmetric environments

Abstract

Around the world, strict privacy regulations are gradually being implemented, with the intended purpose of facilitating consumers to protect their privacy. This paper analyzes the unintended consequences of privacy regulations in the context of asymmetric data advantage. To this end, this paper constructs a model of behavior-based price discrimination, where one firm (such as the incumbent) possesses more data than the other (such as the entrant). The results demonstrate that stricter privacy regulation always benefits the data-advantaged firm. However, it has negative implications for both the data-disadvantaged firm and consumers in most cases. Furthermore, strict regulation leads to weakened competition and intensified mismatching. Therefore, this paper suggests a lenient regulatory policy.