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Abstract: Paying for Anonymity: Privacy, Price Discrimination, and the Value of Anonymous Transactions

When firms are able to recognize their previous customers, they may use information about consumers' purchase histories in order to price discriminate. We analyze a model with a monopolist and a continuum of heterogeneous consumers, where consumers are able to circumvent being identified as past customers (or to "opt out" from being tracked), possibly at a cost (e.g. exerting effort to understand disclosures, erasing cookies, using a virtual credit card, etc). When consumers can costlessly opt out, they all individually choose privacy, which paradoxically results in the highest profit for the monopolist. In fact, consumers are better off overall when opting out is very costly. In a more general setting, we show that when there exists a gatekeeper that is able to act as a privacy conduit, this privacy gatekeeper would only charge the firm in equilibrium, making privacy costless to consumers. Consequently, the existence of a privacy gatekeeper hurts consumers. With uniformly distributed valuations, firm profit and social surplus are non-monotonic in the cost of opting out, and social surplus is highest when opting out is prohibitively costly. We consider extensions of the model, including a setting where consumers may benefit from being identified, and an overlapping generations model where the monopolist cannot distinguish among "newly born" consumers, consumers who opted out, and consumers who have previously not purchased.