Behavior-Based Pricing Under Informed Privacy Consent: Unraveling Autonomy Paradox

The implementation of recent privacy protection regulations mandates that firms obtain privacy consent from consumers before acquiring their private data. This procedure, known as “informed privacy consent,” has significant implications for behavior-based pricing, wherein firms engage in third-degree price discrimination based on consumers’ purchase history. Before keeping track of consumers’ purchasing history for implementing price discrimination, firms must seek consumers’ privacy consent, enabling consumers to autonomously make decisions regarding their data. These endogenous privacy decisions are shaped by several factors, such as the cost of risk from privacy breaches, anticipation of future utility changes driven by price discrimination and personalized products, and rewards for opting in. Although consumers strategically decide their privacy choices to get the best future utility, in equilibrium, none of them exclusively benefit from their choices, which leads to a decrease in overall consumer surplus even with the enhanced utility from personalized products and rewards for opting in. Firms, despite the cost of providing the rewards, earn higher profits by exploiting consumers’ strategic privacy decisions, which alleviates price competition. Our findings underscore an autonomy paradox that empowering consumers to make informed decisions about their privacy rights does not necessarily lead to increased consumer surplus. This result implies privacy regulations founded on informed consent may lead to unintended consequences.