Competing for Information: A Duopoly of Personalized Service Provision under Privacy Concerns

Abstract

There is “no free disposal” (NFD) in the consumption of online personalization services, as this activity inherently involves sharing of personal and preference information that creates disutilities to the consumer. Not only are more services not necessarily better for the consumer, but these services are also provided for free as firms extract value from the usage of consumer information rather than from directly pricing the services. Firms may offer personalization through a “take-it or leave-it” approach (the fixed-services strategy) or allow consumers to choose a subset of the portfolio of services offered (the variable-services strategy). We model a duopoly of firms that are heterogeneous in their marginal value for consumer information (MVI) and interact through a two-stage dynamic game, where the firms choose a fixed- or variable-services strategy in the first stage and the corresponding level of services in the second. Our findings suggest that when the MVIs of competing firms are sufficiently different, there is a unique subgame-perfect Nash equilibrium (SPNE) in pure strategies where both firms offer fixed-services such that they segment the market. As the difference in their MVIs increase, the high MVI firm continues to offer fixed-services while the low MVI firm enjoys the option of offering variable services. A duopoly of high MVI firms results in both firms offering variable services as long as one firm has very large MVI, and both offering fixed-services otherwise. Interestingly, while the former is consumer welfare maximizing, the latter results in a third of the market (consisting of privacy seekers) not being served. Our results lead to important managerial and policy implications, as well as interesting extensions to extant location models.