In previous privacy studies, consumers have reported their unease with online retailers that collect a lot of personal data. Consumers claim they will switch to alternative providers or cancel transactions if data collection is deemed excessive. Therefore, privacy appears to be a competitive factor in electronic commerce.
This paper describes a study which quantifies the degree to which privacy is a competitive advantage for online retailers. In an experiment, we offered 225 participants the option to purchase one DVD from one of two online stores. Throughout the study, one online shop asked for more invasive personal data—as confirmed by an exit-questionnaire. In the test treatment, the privacy-invasive store sold DVDs for one Euro less than the other, and in the control treatment, both stores sold DVDs for the same price. Across both treatments, 74 participants made a purchase and had the DVD they bought delivered.
In our study we found that, when the price of DVDs was the same between both stores, the shop asking for less personal data did not amass the entire market. When consumers were offered a trade-off between price and privacy, the vast majority of customers chose to buy from the cheaper, more privacy-invasive, firm; this firm got both a larger market share and higher revenue. The cheaper shop generated strong dissatisfaction with their privacy practises; in contrast, consumers of the more expensive store displayed only weak dissatisfaction with price. We established the validity of our analysis by checking users made informed choices, and did not select one firm over the other due to hasty decision-making or ordering effects. We found no support for either a materialistic lifestyle nor the quest for immediate gratification as to why customers chose the cheaper but privacy-unfriendly store.
Economics of privacy Experiment Online shopping Privacy concern Willingness to pay for privacy