Page 328 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Unit 12: Customer Privacy

Economists would say that an externality is present. The actions of the party who buys the Notes
mailing list will potentially impose costs on the individuals on that list, but the seller of the
mailing list ignores those costs when selling it.
These costs could be mitigated, to some degree, if the individual who is on the mailing list has
a voice in the transaction. For example, the individual could forbid all secondary transactions in
his personal information. Or, more generally, the individual could allow his information to be
distributed to companies who would send him information about laser printers, but not about
office furniture.
These considerations suggest that the difficulty in the “annoyance” component of privacy could
be significantly improved if the communications channels between the buyers and the sellers
were clearer, the information conveyed was more accurate, and third-party transactions were
restricted only to those transactions that the original consumers authorized.

12.2.9 Incentives Involving Payment

Let us now consider a more difficult case, the case where the buyer’s revealing information
about himself is detrimental. Suppose that the buyer wishes to purchase life insurance but
knows information about his health that would adversely influence the terms under which
seller would offer insurance. In this case, the buyer does not want information released that
would influence the price at which the insurance would be offered.

Suppose for example that the potential buyer of insurance is a smoker, and knowledge of this
information would result in higher life insurance premium. Should the buyer be required to
truthfully release the information? Since the information here concerns the price at which the
service (insurance) is offered, the incentives are perfectly opposed: the buyer would not want to
reveal that he is a smoker, while the seller would want to know this information.
Note, however, that a nonsmoker would want this particular information about himself revealed.
Hence the insurance company has an easy solution to this problem: they offer insurance at a
particular rate appropriate for smokers, and then offer a discount for non-smokers. This would
succeed in aligning information incentives for the buyer and seller.
More generally, suppose that the price that the seller would like to charge is higher for people
with some characteristic C. Then people who have that characteristic have bad incentives to
reveal it, but people who don’t have that characteristic have good incentives to reveal it. It is in
the interests of the seller to construct the transaction in a way that the information is revealed.

12.2.10 Contracts and Markets for Information

We have seen that several of the problems with personal privacy arise because of the lack of
information available between concerned parties. Perhaps some of these problems could be
mitigated by allowing for more explicit ways to convey information between buyers and sellers.
For example, it is common to see boxes on subscription cards that say “check here if you do not
want your name and address redistributed to other parties.” This is a very primitive form of
contract. A more interesting contract might be something like: “Check here if you would like
your name distributed to other parties who will provide you with information about computer
peripherals until 12/31/98. After that, name and address will be destroyed. In exchange you will
be paid $ 5.00 for each list to whom your name and address is distributed.”
Although it would be hard to fit this sort of contract on a subscription response card, it would be
easy to fit it on a Web page. The contract that is being offered implicitly assigns property rights
in an individual’s name and address to him or herself, unless the individual chooses to sell, or
more properly, rent, that information.

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