An economic model of portal competition under privacy concerns

Due to inherent privacy concerns, online personalization services such as those offered through toolbars and desktop widgets are characterized by "no-free-disposal" (NFD) property, in that more services are not necessarily better for the consumer. There are two defining characteristics of this market: First, these services are "free" as firms value consumers' preference information shared for personalization; second, while some firms provide toolbars of a fixed-length as a take-it or leave-it offer, many others offer consumers the option of choosing a subset of the services offered. Our findings suggest that in a fixed-services duopoly where firms are endowed with sufficiently different marginal values for information (MVIs), the high MVI firm caters to convenience seekers in the market while the low MVI firm serves a portion of largely privacy seeking consumers in equilibrium; if the duopoly were characterized by sufficiently high MVIs, firms would minimize differentiation and offer the same number of services. However, when two high-MVI firms pursue variable-services strategy, there is a unique symmetric equilibrium that maximizes consumer surplus. Counter to intuition, some very high-MVI firms may prefer the consumer-surplus maximizing strategy of offering the full set of variable services over the fixed-services strategy, thus maximizing both consumer and social welfares. Our results lead to important managerial and policy implications and interesting extensions to the existing location models.