Competition and consumer data: The good, the bad, and the ugly

Many retailers and social media sites trade their customer data to brokers who use these data to identify relevant market demographics and target segments. This information is valuable to a wide array of industries from trending fashion to health care. For consumers who value privacy however, trading data can be a “bad” and firms that do so may suffer a reputation loss. Our paper investigates whether a self-regulated market operating with transparent privacy policies will lead to an efficient market outcome. Competition in the product market is characterized by both horizontal and vertical differentiation, the latter being affected by the firms' decisions whether or not to trade their consumer data. We identify market conditions under which, from the perspective of consumers, there is excessive selling of consumer data, but we also identify cases in which both consumers and firms would be better off with stricter privacy legislation or restrictions. We show that there are yet other cases where firms' concern about loss of reputation leads to too little trading of data and both consumers and firms would be better off if there were more data trading.