Portal Competition: The Battle for Customer Information in the Presence of Privacy Concerns

RAMNATH K. CHELLAPPA - University of Southern California - Information and Operations Management Department

RAYMOND SIN - University of Southern California - Marshall School of Business - Department of IOM

Document: Available from the SSRN Electronic Paper Collection

ABSTRACT:

"The revenue model of online portals is based on access to consumers and their preference information by offering "free" personalized services whose usage is affected by consumers' concern for information privacy. We study competitive market outcomes under two regulatory environments: one where portals can ensure through technological means that consumers use an agreed level of services (enforcement), and the other where consumers are free to choose their preferred level from a set of offered services (no enforcement). This contrasts the difference between service offerings that require registration, bundle ad-wares and Web beacons with those that allow consumers to self select their preferred services. We consider a duopoly where online portals may vary in their marginal value for information (MVI) acquired from consumers using their services. Our results show that the outcome in a market under no enforcement will be characterized by two large MVI portals with both offering consumer welfare maximizing number of services and sharing the market equally (symmetric equilibrium). On the other hand, when portals can ensure service usage and information collection, there are two distinct market outcomes depending upon the relative marginal valuations of the portals. One portal will serve privacy sensitive consumers while the other will serve convenience seeking consumers if the former possesses a sufficiently smaller MVI than its competitor (asymmetric equilibrium). If the MVIs of both portals exceed a threshold, then independent of their relative valuations, they will end up offering the same level of services and serving the same segment of consumers, thus sharing the market equally. It is, however, never optimal for a small MVI portal to enforce service usage if a large competitor does not. Counter to intuition, portals may not always want to dictate the amount of services used by the consumers; when portals possess a high enough MVI (perhaps because they run their own advertising networks), the market will be characterized by an equilibrium that is also social welfare maximizing. From a theoretical standpoint, this research presents a particular variation and significant extension to spatial competition models in that vendors incur a cost of locating themselves and consumers have finite but distributed reservation levels."