The paper "Privacy, Economics, and Price Discrimination on the
Internet," to appear in the Proc. 5th International Conference
on eCommerce, is now available on my Web page. I thought it
might be of interest to you, and apologize for the spam if it
is not.
Best regards,
Andrew Odlyzko
full paper URL: http://www.dtc.umn.edu/~odlyzko/doc/privacy.economics.pdf
Privacy, Economics, and Price Discrimination
on the Internet
Andrew Odlyzko
Digital Technology Center
University of Minnesota
Minneapolis, Minnesota
odlyzko@umn.edu
http://www.dtc.umn.edu/~odlyzko
Abstract:
The rapid erosion of privacy poses numerous puzzles. Why is it occurring,
and why do people care about it? This paper proposes an explanation
for many of these puzzles in terms of the increasing importance of
price discrimination. Privacy appears to be declining largely in order
to facilitate differential pricing, which offers greater social and
economic gains than auctions or shopping agents. The thesis of this
paper is that what really motivates commercial organizations (even
though they often do not realize it clearly themselves) is the growing
incentive to price discriminate, coupled with the increasing ability
to price discriminate. It is the same incentive that has led to the
airline yield management system, with a complex and constantly changing
array of prices. It is also the same incentive that led railroads to
invent a variety of price and quality differentiation schemes in the
19th century. Privacy intrusions serve to provide the information that
allows sellers to determine buyers' willingness to pay. They also allow
monitoring of usage, to ensure that arbitrage is not used to bypass
discriminatory pricing.
Economically, price discrimination is usually regarded as desirable,
since it often increases the efficiency of the economy. That is why it
is frequently promoted by governments, either through explicit mandates
or through indirect means. On the other hand, price discrimination
often arouses strong opposition from the public.
There is no easy resolution to the conflict between sellers' incentives
to price discriminate and buyers' resistance to such measures.
The continuing tension between these two factors will have important
consequences for the nature of the economy. It will also determine
which technologies will be adopted widely. Governments will likely play
an increasing role in controlling pricing, although their roles will
continue to be ambiguous. Sellers are likely to rely to an even greater
extent on techniques such as bundling that will allow them to extract more
consumer surplus and also to conceal the extent of price discrimination.
Micropayments and auctions are likely to play a smaller role than is
often expected. In general, because of the strong conflicting influences,
privacy is likely to prove an intractable problem that will be prominent
on the the public agenda for the foreseeable future.
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R. A. Hettinga