Essays on economics of internet personalization

This dissertation consists of three essays related to the economics of personalization of information goods such as web content, mobile services and online advertising. Essay 1. Personalization in a two dimensional product differentiation model: Impact of market structure and the Q-F ratio. In this essay, we examine the economics of personalization in the case of information goods and services. We extend prior work in this area in several ways: one, we consider a more general two dimensional duopoly model of product differentiation where consumers attach different levels of importance to various product attributes. Two, we allow for imperfect personalization in our model and consider how improvements in personalization technologies impact the equilibrium. Finally, we examine different market structures based on the locational differentiation and examine how firms' ex-ante location impacts equilibrium with or without personalization. We report the equilibrium in terms of the 'Quality-Fit' ( Q-F) Ratio, which measures the relative strength of consumer preferences on each dimension of product differentiation. Essay 2. Personalization, information sharing and privacy—an analytical perspective. Advances in information technology and access to huge volumes of consumer information enable firms to offer personalized products to customers. Conventional wisdom dictates that direct marketers should zealously guard all information about their consumers. However, the truth is that many direct marketers routinely share customer information with one another (Chen et al. 2001). In this paper, we present a simple economic model to analyze the equilibrium in a market where firms share consumer information with one another, when this information can be used to offer personalized products. We also analyze issues such as optimal scope of personalization, different information ownership scenarios and the presence of privacy conscious consumers. Essay 3. Examining the personalization-privacy tradeoff—an empirical investigation with email advertisements. Dale Carnegie once said that the sound of one's name is the sweetest for any person. Much Internet personalization acts on this mantra by trying to create an online environment where customers are greeted by name and are recommended products based on their preferences. However, no clear empirical evidence exists as to how consumers actually respond when firms use their information to offer a personalized product. Using theories from psychology and consumer behavior, we address this dilemma by developing hypotheses related to consumers' response to a firm's collection and use of information for personalization. To test these hypotheses, we propose a multi-stage ordered probit model using a hierarchical Bayesian framework to account for consumer heterogeneity via individual level parameter estimates. The data for this research comes from a website which captured information on actual consumer responses to ten million email advertisements sent to 600,000 customers over a nine month period. We examine the impact of different types of personalization as well as measure consumer response at multiple levels. We also control for consumer and promotion specific characteristics in our model. Our results not only indicate the economic benefits of personalization but also highlight consumers' privacy concerns. The main results are as follows: first, emails personalized only on the basis of consumers' product preferences get a more favorable response from consumers than those with no personalization. Second, we show that more than 85% consumers react negatively to personalized greetings in an email, suggesting that consumers are likely to perceive a violation in privacy if they see their name in an email advertisement. Third, we show that consumer response is mixed if both personalized greetings and product-based personalizationare used in an email. While most consumers react negatively if both personalized greetings and product-based personalization are used in an email, consumers who buy more often from a firm prefer emails where personalized greetings are accompanied by reliable product recommendations. This suggests that familiarity with a website mitigates customers' privacy concerns. Overall, we show that customers differ significantly in their preference for different types of personalization and that 'personalized' personalization (where different customers receive different levels of personalization) is more effective than all-inclusive personalization (in which each advertisement is personalized at multiple levels). (Abstract shortened by UMI.)