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Direct Marketing: Privacy and Competition

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Abstract

Direct mail, telemarketing, and commercial email are key elements of the promotional mix. This research addresses the trade-off between the benefit to latent consumers (who, absent direct marketing, would not enjoy some product) against the costs of avoidance and intrusion on privacy guardians (who have no interest in the item). We find that guardians' avoidance and sellers' investments in collecting information are strategic complements. This implies that measures to conceal direct marketing will increase its cost-effectiveness and lead sellers to spend more. We compare the outcomes under monopoly and duopoly. Both market structures lead to outcomes that are not socially optimal, because sellers ignore the costs to privacy guardians. Competition leads sellers to increase spending on direct marketing and guardians to increase avoidance. The increased marketing raises the benefit to latent consumers, while the increased avoidance raises privacy guardian's costs. On balance, competition reduces welfare if the cost of intrusion is sufficiently high. Direct marketing can be regulated through taxes based on solicitations or sales. We find that, in the presence of competition, the tax on solicitations is relatively more effective.

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... For example, Ghose and Chen (2003) examine these trade-offs in the context of personalization, where firms can adjust the level of personalization through privacy enhancing technology. In the same vein, Akcura and Srinivasan (2003) and Hann et al. (2003) study similar trade-offs in the context of target marketing. Hann et al. (2002) empirically quantifies the value of website privacy protection. ...
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NY: Atheneum, 1967. and hence, by Proposition 3, higher than with monopoly
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