Privacy protection investment decisions of e-commerce platforms under mean-variance preferences

Abstract

As data privacy issues become increasingly prominent in the digital economy, differences in privacy protection investment and risk preferences among supply chain members frequently lead to decision-making conflicts. This study considers a two-tier supply chain consisting of a supplier and an e-commerce platform, where the platform may unintentionally cause consumer privacy breaches and faces a certain probability of being held accountable and compensating consumers. The objective is to explore the decision-making mechanisms of supply chain members under different risk preferences and privacy protection investment modes, and to analyze the impact of privacy protection investment and risk preferences on supply chain members by considering the compensation cost associated with privacy breaches. We derive the following main conclusions: regardless of whether the platform invests in privacy protection, an increase in the probability of privacy breaches $f_1$ suppresses market demand, lowers the wholesale price, and reduces the profits of both the supplier and the platform. Given a certain level of protection capability and technological efficiency, the e-commerce platform should actively invest in privacy protection. The platform’s risk attitude affects its pricing strategy and profit distribution structure; although a risk-averse platform tends to set a lower price to expand market demand, its subjective utility is generally lower than that of a risk-neutral platform.