Data Tracking Under Competition

We explore the welfare implications of data-tracking technologies that enable firms to collect consumer data and use it for price discrimination. The model we develop centers around two features: competition between firms and consumers’ level of sophistication. Our baseline environment features a firm that can collect information about the consumers it transacts with in a duopoly market, which it can then use in a second, monopoly market. We characterize and compare the equilibrium outcomes in three settings: (i) an economy with myopic consumers, who, when making purchase decisions, do not internalize the fact that firms track their behavior and use this information in future transactions; (ii) an economy with forward-looking consumers, who take into account the implications of data tracking when determining their actions; and (iii) an economy where no data-tracking technologies are used due to technological or regulatory constraints. We find that the absence of data tracking may lead to a decrease in consumer surplus, even when consumers are myopic. Importantly, this result relies critically on competition: Consumer surplus may be higher when data-tracking technologies are used only when multiple firms offer substitutable products.