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- Title
Data Tracking Under Competition.
- Authors
Bimpikis, Kostas; Morgenstern, Ilan; Saban, Daniela
- Abstract
When Consumers May Benefit from Firms Tracking and Exploiting Their Data In today's economy, firms routinely collect, track, and leverage consumer data to make decisions. Although the effects of these practices on consumers are complex and context-dependent, one may expect that that consumers would be disadvantaged if their data are used for a purpose that does not create value for them, such as personalized pricing. In "Data Tracking Under Competition," Bimpikis, Morgenstern, and Saban develop a game-theoretic model to explore how technologies that allow firms to use consumer data for price discrimination affect market outcomes. Perhaps counter to intuition, they find that data-tracking practices may actually increase consumer surplus, even if consumers do not develop privacy concerns associated with disclosing their data and act myopically. However, this only occurs when multiple firms compete for consumers' purchases. The study highlights the crucial role of competition in determining the benefits that consumers may derive from the data they generate and underscores the importance of considering competition in debates about the economic consequences of data-tracking practices. We explore the welfare implications of data-tracking technologies that enable firms to collect consumer data and use it for price discrimination. The model we develop centers around two features: competition between firms and consumers' level of sophistication. Our baseline environment features a firm that can collect information about the consumers it transacts with in a duopoly market, which it can then use in a second, monopoly market. We characterize and compare the equilibrium outcomes in three settings: (i) an economy with myopic consumers, who, when making purchase decisions, do not internalize the fact that firms track their behavior and use this information in future transactions; (ii) an economy with forward-looking consumers, who take into account the implications of data tracking when determining their actions; and (iii) an economy where no data-tracking technologies are used due to technological or regulatory constraints. We find that the absence of data tracking may lead to a decrease in consumer surplus, even when consumers are myopic. Importantly, this result relies critically on competition: Consumer surplus may be higher when data-tracking technologies are used only when multiple firms offer substitutable products. Supplemental Material: The online appendix is available at https://doi.org/10.1287/opre.2023.2489.
- Subjects
PRICE discrimination; CONSUMER behavior; CONSUMERS' surplus; ACADEMIC debating; PURCHASING; CONSUMERS; ECONOMIC impact
- Publication
Operations Research, 2024, Vol 72, Issue 2, p514
- ISSN
0030-364X
- Publication type
Article
- DOI
10.1287/opre.2023.2489