The effect of privacy on market structure and prices

Protection of consumers' privacy is often motivated by the fear that, without it, consumers may be exploited via personalized pricing. We explain how privacy may affect prices in search markets through a different channel, namely, the effect privacy has on market structure. If privacy is not protected, then in addition to consumer search, firms may engage in targeted advertising. We show that privacy protection reduces consumer surplus if firms price discriminates between the search and advertising markets. Absent such discrimination, privacy protection increases consumer surplus only if the advertising market is large and noncompetitive. We relate our results to the "privacy paradox."