Online shopping is convenient for consumers. However, it also makes it easy for sellers to keep track of individual customers’ purchasing decisions and thereby learn about their willingness to pay. The sellers can then charge personalized prices that leave consumers with a smaller surplus than otherwise. To avoid being exploited in that way, consumers can try to hide their identities when they shop online. In a recently published article of the IJIO, Surfing incognito: Welfare effects of anonymous shopping, Johan N.M. Lagerlöf investigates whether the market tends to generate too weak or too strong incentives for consumers to hide. He shows that consumers will under some circumstances protect their identities too little. This is due to a positive externality of hiding, which has not been recognized before but is identified in Lagerlöf’s article.
Given the seller practice described above, a consumer has an individual incentive to, if she can, hide her purchase history from the seller. Indeed, if being a returning customer is interpreted as being a high-valuation customer, you are better off pretending to be a new customer. There are several ways in which consumers can hide their purchase histories. For example, they can refrain from joining loyalty programs, set their browsers to reject cookies, or choose to end a newspaper subscription and then start a new one, rather than renewing the old subscription. These kinds of defense measures might come at a cost, but they are certainly available.
Should we expect consumers to do too much or too little of such anonymization, from a social welfare perspective? Consumer groups appear to believe that individual consumers anonymize their purchase histories too little. Yet the theoretical literature has so far not provided any support for that belief – for example, Conitzer et al. (2012) identify a negative externality associated with consumers’ hiding activity, which would mean that the market yields too much anonymization. However, Lagerlöf shows that there is also a positive externality associated with consumers’ hiding activity, and that this can outweigh the negative one. Consequently, economic theory can be reconciled with the view held by the consumer groups that individual consumers fail to protect their identities sufficiently well. Moreover, the presence of a positive externality can potentially justify market interventions that facilitate the hiding of one’s identity when shopping online. The positive externality appears early in the consumer’s interaction with the seller, which means that this externality outweighs the negative one (which appears later) if the socially relevant discount factor is small enough.
In the game-theoretic model that Lagerlöf studies, both the negative externality of hiding identified by Conitzer et al. (2012) and the new positive externality appear. To understand these externalities, think of a seller who sells a good in two time periods and who charges a higher price to returning customers than to new ones (as a returning customer is rationally inferred to have a higher valuation). The negative externality arises because a consumer who hides her status as a returning customer can buy the good in period 1 and still be eligible to buy it in period 2 at the lower new-customer price. The individual customer benefits from the second-period price saving she can make thanks to her hiding choice; however, welfare is unaffected as the price is a pure transfer. How does the positive externality arise? Hiding leads to more trade in period 1, as consumers can buy in that period without later being recognized as a returning customer. The individual consumer therefore benefits from hiding, but her benefit is smaller than society’s – the latter cares about the consumer’s full valuation, whereas the consumer cares only about her net surplus (valuation minus price).
(Full paper published in IJIO Volume 87, March 2023)
References
Vincent Conitzer, Curtis R. Taylor, and Liad Wagman, 2012. Hide and Seek: Costly Consumer Privacy in a Market with Repeat Purchases. Marketing Science 31(2), 277–292.
Johan N.M. Lagerlöf, 2023. Surfing Incognito: Welfare Effects of Anonymous Shopping. International Journal of Industrial Organization 87, 102917.