Privacy economics: evidence from the field

It has been argued that privacy is the new currency on the Web. Services offered for free are actually paid for using personal information, which is then turned into money (e.g., using targeted advertising). But what is the exchange rate for privacy? In the largest experiment ever and the first done in field, we shed new light on consumers’ willingness to pay for added privacy.

One in three Web shoppers pay half a euro extra for keeping their mobile phone number private. If privacy comes for free, more than 80% of consumers choose the company that collects less personal information, our study concludes.

Compared to the ever growing number of commercial surveys and academic survey-like studies since privacy became a topical issue in mainstream media outlets, the body of experimental research into privacy economics is worryingly thin. Only two experiments have been published to date that made participants pay extra for better privacy while shopping online.

A 2007 study from CMU reported that participants were willing spend around $0.60 in addition, to shop from a privacy-friendly retailer. Their results applied to privacy-sensitive products and non-sensitive products alike, but required prominent display of four-star and colour-enhanced privacy rating in a product search engine.

In 2009, together with Alastair Beresford and Dorothea Kübler, we invited 225 participants to the lab to shop for DVDs. Participants were given the opportunity to buy a DVD from either of two online stores. All transactions were real: participants had to pay with their own money and received the DVDs they ordered. One store consistently required more sensitive personal data than the other, but otherwise the stores were identical. In one treatment, DVDs were one Euro cheaper at the store requesting more personal information, and almost all buyers chose the cheaper store. We therefore concluded that customers are unwilling to pay for privacy. Surprisingly, in the second treatment when prices were identical, participants bought from both shops equally often.

The remaining empirical literature on privacy economics relies either on surveys, which lack predictive power for real-world transactions, or considers pure information transactions during which no goods or services are consumed—a scenario rarely observed on the Web. We now unveil the results from the first true field experiment ever that has studied price-privacy trade-offs of consumers in their natural habitat.

“Monetising Privacy” is the motto of the report I have jointly prepared with Nicola Jentzsch and Andreas Harasser, colleagues at the German Institute for Economic Research (DIW Berlin), now published by the European Network and information Security Agency (ENISA).

We invited 443 participants into the laboratory in Berlin where they could shop for cinema tickets. The laboratory experiment was complemented by a field experiment with over 2,300 participants and 139 transactions and observations. The field experiment confirmed the trends observed in the laboratory; the only difference noticed is that in case of no price difference the privacy-friendly service providers which request less personal data obtained a greater market share.

Participants had the choice between a privacy-friendly firm and a privacy-unfriendly firm. Because the tickets were delivered electronically, both companies required a minimum of personal information: full name, date of birth and email address. Depending on treatment, the privacy-invasive seller also requested the mobile phone number or permission to use the email address for marketing. We had checks in place to make sure that correct data was provided.

The majority of participants purchased two tickets and remained loyal to the seller where they had bought the first ticket (93%). The laboratory experiment also shows that the majority of consumers buy from a more privacy-invasive provider if the service provider charges a lower price—50 Euro cents in our case. A non-negligible proportion of the experiment’s participants, however, chose to pay a premium for privacy. The privacy-friendly firm achieves a market share between 62% and 83% if there are no price differences. 29% of the buyers were willing to pay extra for not having to reveal their mobile phone number; this share drops to 9% for avoiding marketing emails. However, these numbers send a clear message: A sizeable proportion of consumers are willing to pay a higher price for privacy. Online businesses can capitalise these concerns. Privacy-friendliness is a win-win for online retailers and their customers.

4 thoughts on “Privacy economics: evidence from the field

  1. Of the study participants who didn’t give their cellphone #, how many had a cellphone? And of those if any who didn’t have one, how many cited privacy concerns as the/a reason for not having one? (Assuming the studies collected that data.)

  2. Seems to confirm that consumers aren’t able to really put a true ‘value’ on their information/privacy. When such a small price difference sways the buyers towards the ask-for-more-info companies, this seems obvious. Interesting, but not surprising.

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