Data Markets with Privacy-Conscious Consumers

Abstract

We study data linkages among heterogeneous firms and examine how they shape the outcome of privacy regulation. A single consumer interacts sequentially with two firms: one firm collects data on consumer behavior, and the other firm leverages the data to set a quality level and a price. Privacy-conscious consumers distort their purchases from a data-collecting firm to manipulate the data-using firm's beliefs. We identify conditions under which data linkages increase total firm profits. Therefore, if firms can trade consumer data efficiently, our setting provides a rationale for the existence of data markets even with privacy-conscious consumers.