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Endogenous privacy and heterogeneous price sensitivity

Masuyama, Ryo (2023): Endogenous privacy and heterogeneous price sensitivity.

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This study considers an incumbent firm and a newcomer competing in an old market and a new one in a modified Hotelling model. Consumers must pay a privacy cost to conceal their personal information. Otherwise, their personal information is left in the old market, and only the incumbent firm can utilize it. If consumers have homogeneous price sensitivity, both consumer and total surpluses are increasing with the privacy cost. However, if consumers' price sensitivity is sufficiently heterogeneous, both consumer and total surpluses are maximized when the privacy cost is zero. If heterogeneity is intermediate, consumer (total) surplus is maximized with zero (at a positive) privacy cost. Clearly, authorities should pay close attention to the heterogeneity in price sensitivity while deciding on privacy regulation.

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