۱- Introduction

۲- Literature review

۳- Theoretical framework: the baseline model

۴- Calculations: privacy and security

۵- Conclusions and policy remarks

References

Abstract

This paper contributes to the literature on security in digital markets. We analyze a two-period monopoly market in which consumers have privacy concerns. We make three assumptions about privacy: first, that it evolves over time; second, that it has a value that is unknown by all market participants in the first period; and third, that it may affect market participants’ willingness to pay for products. The monopolist receives a noise signal about consumers’ average privacy. This signal allows the monopolist to adjust the price in the second period and engage in price discrimination. The monopolist’s price in period 2 acts as a signal to consumers about privacy. This signal, together with consumers’ purchase experiences from the first period, determines demand. We address two scenarios: direct investment in security to improve consumers’ experiences and investment in market signal precision.

Introduction

In the digital age, we live in an always-on world. Our commercial and private lives are migrating to online platforms at a frenetic pace thanks to technological advances and a vast array of apps. To speak of the intersection between technology and privacy is inevitable. Consequently, privacy has long been a moving target. For example, in October 2017, Amazon unveiled Amazon key, which lets deliverers into consumers’ homes.1 It has thus become a reality that corporations not only access our digital data but also gain a window into our very lives. To use this service, consumers must buy a camera and a digital key to enable delivery and guarantee security. Although this idea is original within the industry, it has become the target of hackers.2 As a result, questions over security and trust in digital markets abound. Security in digital markets is therefore a fundamental consideration when consumers are concerned with privacy. We contribute to the literature on security in such markets by analyzing the investment decisions of a two-period monopoly market in which consumers have privacy concerns. The value of privacy is unknown by all market participants in the first period and may affect their willingness to pay for the product. The monopolist receives a noise signal about consumers’ average privacy. This signal enables the monopolist to adjust the price in the second period. The monopolist’s price in this second period acts as a signal to consumers about their privacy. This signal, together with consumers’ purchase experiences from the first period, determines demand. Our setting is novel in that it considers the implications of firms’ investment in security. We address two scenarios: direct investment in security to improve consumers’ experiences and investment in market signal precision. Through direct investment, the firm shows that it cares about each consumer’s individual experiences and thereby seeks to maximize consumers’ maximum willingness to pay. Through investment in market signal precision, the firm tries to manipulate consumers’ information and increase market demand.