Consumers’ privacy concerns and price setting in a multichannel monopoly

Abstract

This paper develops a dynamic model of multichannel price setting under market signaling and learning. A monopolist sells a good through two channels: brick-and-mortar and online. We introduce two novel features: (i) instrumental and idiosyncratic privacy concerns for consumers purchasing online, and (ii) the idea that firms possess better information about the market’s average privacy concerns than individual consumers, and signal this information through prices. In any fully revealing equilibrium, price signaling can distort prices upward compared to a setting in which the monopolist’s private information is common knowledge. Moreover, social welfare may be higher under a non-informative (pooling) equilibrium than under a fully revealing equilibrium if the realized market signal is sufficiently high. These results offer new insights into the interplay between privacy concerns, information asymmetry, and dynamic pricing in the digital economy, with implications for policy design.