DP16873 Towards a Resolution of the Privacy Paradox

Author(s): Kristóf Madarász, Marek Pycia
Publication Date: January 2022
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JEL(s):
Programme Areas: Industrial Organization, Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16873

We provide an explanation for the commonly observed privacy paradox. Suppose that the seller can invest in collecting information about the buyer's preferences and the buyer can counter-invest to decrease the precision of the seller's information thus protecting their privacy. In a large class of imperfect information dynamic games between the buyer, the seller, and privacy platforms, we show that the buyer chooses not to bear any direct costs to protect their information even though the leakage of this information affects the prices charged by the seller and hence affects buyer's payoff. Choosing between different privacy plat- forms, the buyer always chooses a cheapest platform irrespective of its and its alternatives' informational characteristics.