A Model of Advertiser - Portal Contracts : Personalization Strategies Under Privacy Concerns

Online portals provide personalization for "free" since the information acquired from consumers' usage of these services is valuable for advertising and targeted marketing purposes. Consumers' usage of services is determined by the tradeoff between their marginal value for personalized services and the resulting information privacy concerns and is captured by their personalization for privacy (P4P) ratio. A portal's decision to offer personalized services is dependent upon its cost of offering the services and revenue due to advertisers' marginal value for information (MVI) acquired therein. Through three models, our paper examines the strategic interaction between a portal that determines the service level to be offered and advertisers who pay the portal for placing advertisements through which they acquire information. Our first model of an independent portal finds that while all profits are increasing in the advertiser's MVI, with increasing P4P ratio the advertiser's profits are increasing at a faster rate than the portal's profits. In our second model, we consider an information sharing regime between two advertisers and find that a high MVI advertiser has a distinct first-mover advantage in announcing the services rate for the entire market. Our final model considers a portal that has its own advertising capabilities and we find that while this case is superior to others in the high MVI advertiser's and portal's profits, the consumer welfare and overall social welfare is dependent on the relative valuations of the two advertisers