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In 2013, Edward Snowden shocked the world by revealing large surveillance programs of US intelligence services. In 2012, Sebastian Dengler and I had started to think about privacy from an economic perspective. Of course, we were not the only ones, as this interim review article shows. It turned out to be a hard task to trade off the costs and benefits of privacy against other goods. Therefore, we are very happy that this work has now borne fruit.
Our paper, “Consumers’ Privacy Choices in the Era of Big Data” (working paper version), has just been accepted for publication in Games and Economic Behavior. There, combining Industrial Organization, Behavioral Economics, and insights about digital markets, we start from the observation that recent progress in information technologies provides sellers with detailed knowledge about consumers’ preferences, approaching perfect price discrimination in the limit. We construct a model where consumers with less strategic sophistication than the seller’s pricing algorithm face a trade-off when buying. They choose between a direct, transaction cost-free sales channel and a privacy-protecting, but costly, anonymous channel. We show that the anonymous channel is used even in the absence of an explicit taste for privacy if consumers are not too strategically sophisticated. This provides a micro-foundation for consumers’ privacy choices. Some consumers benefit but others suffer from their anonymization.