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RESEARCH PRODUCT

Security in digital markets

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Abstract This paper contributes to the literature on security in digital markets. We analyze a two-period monopoly market in which consumers have privacy concerns. We make three assumptions about privacy: first, that it evolves over time; second, that it has a value that is unknown by all market participants in the first period; and third, that it may affect market participants' willingness to pay for products. The monopolist receives a noise signal about consumers' average privacy. This signal allows the monopolist to adjust the price in the second period and engage in price discrimination. The monopolist's price in period 2 acts as a signal to consumers about privacy. This signal, together with consumers' purchase experiences from the first period, determines demand. We address two scenarios: direct investment in security to improve consumers' experiences and investment in market signal precision.