Strategic Responses to Personalized Pricing and Demand for Privacy: An Experiment

Abstract: We consider situations where consumers are aware that a statistical model determines the price of a product based on their observed behavior. Using a novel experiment varying the context similarity between participant data and a product, we find that participants manipulate their responses to a survey about personal characteristics, and manipulation is more successful when the contexts are similar. Moreover, participants demand less privacy, and make less optimal privacy choices when the contexts are less similar. Our findings highlight the importance of data privacy policies in the age of big data, where behavior in seemingly unrelated contexts might affect prices.