DP15203 Information Revelation and Privacy Protection
We propose a microfoundation for consumers' privacy preferences and examine how it shapes the outcome of regulation. A single consumer interacts sequentially with two heterogeneous firms: the first firm collects data on consumer behavior, which the second firm uses to set a quality level and a price. Thus, the consumer manipulates her behavior to influence the future terms of trade. In equilibrium, manipulation is beneficial to the consumer when the recipient firm is sufficiently similar to the collecting firm (as measured by the relative salience of quality and price of their two products). We then evaluate the impact of privacy regulation, including mandatory transparency, explicit consent requirements, and limits to discriminatory offers. We show that transparency has an ambiguous effect on consumer welfare and that consent requirements are unambiguously beneficial to consumers but that limits to discrimination are harmful to consumers in equilibrium.