Jaisingh, Barron, Chaturvedi and Mehta; Privacy on the Internet Privacy on the Internet: An Economic Analysis * Jeevan Jaisingh, Jack Barron, Alok Chaturvedi and Shailendra Mehta Krannert Graduate School of Management Purdue University West Lafayette, IN, 47907 {jeevan_jaisingh;barron;alok;mehta}@mgmt.purdue.edu Contact Author: Jeevan Jaisingh Ph: (765) 496 6301; Fax: (765) 494 9658 Abstract This paper seeks to address the sharp increase in public debate about privacy issues, particularly on the issues of Internet privacy and the value of personal information. The research questions we are addressing here are – How should an Internet Service Provider (ISP) price its service given that the consumers vary in their valuation for privacy and also vary in terms of the value of their personal information to a third party? Should the ISP have a blanket policy of never collecting, or a policy of always collecting and revealing information? We calculate the separating and pooling strategies for the ISP under asymmetric information and compare them with the full information benchmarks. We find that in some cases the ISP may be no worse off than in the full information case while in other cases it may have to restrict the set of contracts so that they are incentive compatible and individually rational. 1.Introduction The technological developments that have made e-commerce possible have also enhanced the ability of companies to collect, store, transfer, and analyze vast amounts of data, from and about the consumers who visit their store on the World Wide Web (FTC 2000). These developments have increased privacy concerns among consumers, especially online consumers. According to a recent Business Week/Harris poll (Business Week 1998), privacy is the number one consumer issue facing the Internet. These concerns about privacy need to be addressed to enable the growth of E-commerce. The other side of the story is that personal information is a valuable asset to private and governmental institutions, which use it to reduce their costs of operation (Laudon 1996). The increasing thirst for personal information, and innovations in targeting technique have made targeted marketing the hottest form of marketing, growing at twice the rate of America’s GNP. In 1995, direct marketing resulted in $600 billion in sales (Solove 2000). It is evident that a proper balance needs to be achieved between the consumers’ concerns for privacy and the needs of firms for personal information. This paper seeks to address the sharp increase in public debate about privacy issues, particularly on the issues of Internet privacy and the value of personal information. Past research (Laudon 1996, Kang 1998, Sovern 1999) has suggested an information market-based solution where consumers reveal potentially useful personal information in return for money and personalized services. However to the best of our knowledge, there has not been much * This research was partially funded by National Science Foundation grants # EIA-0075506 and DMI-0122214 1