We introduce the concept of marketing avoidance consumer efforts to conceal themselves and to deflect

Transcription

1 MANAGEMENT SCIENCE Vol. 54, No. 6, June 2008, pp issn eissn infors doi /nsc INFORMS Consuer Privacy and Marketing Avoidance: A Static Model Il-Horn Hann Marshall School of Business, University of Southern California, Los Angeles, California 90089, hann@arshall.usc.edu Kai-Lung Hui Departent of Inforation Systes, City University of Hong Kong, Hong Kong and Departent of Inforation Systes, National University of Singapore, Singapore , lung@cop.nus.edu.sg Sang-Yong T. Lee College of Inforation and Counications, Hanyang University, Seoul , Korea, tolee@hanyang.ac.kr Ivan P. L. Png Departent of Inforation Systes and School of Business, National University of Singapore, Singapore , ipng@cop.nus.edu.sg We introduce the concept of arketing avoidance consuer efforts to conceal theselves and to deflect arketing. The setting is one in which sellers arket soe ite through solicitations to potential consuers, who differ in their benefit fro the ite and suffer har fro receiving solicitations. Concealent by one consuer induces sellers to shift solicitations to other consuers, whereas deflection does not. Solicitations cause two externalities: direct har on consuers and the (indirect) cost of consuer concealent and deflection. We find that in arkets where the arginal cost of solicitation is sufficiently low, efforts by low-benefit consuers to conceal theselves will increase the cost-effectiveness of solicitations and lead sellers to arket ore. However, concealent by high-benefit consuers leads sellers to arket less. Furtherore, concealent by low-benefit consuers increases direct privacy har, and consuer welfare is higher with deflection than concealent. Finally, it is optial to ipose a charge on solicitations. Key words: arketing avoidance; privacy; advertising; prootion; segentation History: Accepted by Jagohan S. Raju, arketing; received March 14, This paper was with the authors 1 year for 6 revisions. Published online in Articles in Advance April 22, Introduction Privacy is a key concern for consuers (Westin 2001). Consuers use video recorders, TiVo, caller ID, spa filters, pop-up blockers, anonyous browsing, and other devices and techniques to avoid arketing and protect their privacy. In 2005, the U.S. industry spent $17.8 billion on consuer telearketing (Direct Marketing Association 2006). However, over 100 illion nubers were registered with the do not call list (Federal Trade Coission 2005). Just as iproveents in technology create new techniques of arketing, they provide fresh ways to avoid arketing and present new challenges to the arketing profession and for public policy. How should arketers respond to consuer avoidance of arketing? How does their strategic interaction affect consuer privacy? What is the appropriate public policy toward arketing activities that ipose har on consuers? Prior analytical research has assued that consuers passively accept prootions. In contrast, we introduce the concept of arketing avoidance, and analyze the endogenous trade-off between seller arketing and consuer privacy in a static setting. Consuers can get soe ite only through direct arketing, but the arketing directly iposes privacy har on consuers and indirectly leads consuers to avoid arketing in two ways concealent and deflection. Concealent reduces the exposure of consuer addresses to sellers, whereas deflection turns away solicitations addressed to the consuer. Fro the consuer s viewpoint, both concealent and deflection reduce the likelihood of receiving solicitations. However, for sellers, they differ concealent shifts solicitations to other consuers, whereas deflection causes solicitations to be discarded. Our odel includes two consuer segents high- and low-benefit. When sellers decide expenditures on solicitations, they cannot distinguish the two 1094

2 Manageent Science 54(6), pp , 2008 INFORMS 1095 consuer segents and ignore the direct and indirect externalities that they cause. We show that, in arkets where the arginal cost of solicitation is sufficiently low, seller arketing is a strategic copleent with concealent by low-benefit consuers. Efforts by low-benefit consuers to conceal theselves will increase the costeffectiveness of arketing and lead sellers to increase solicitations. However, efforts by high-benefit consuers in concealent and deflection lead sellers to reduce solicitations. Concealent by low-benefit consuers increases direct privacy har it shifts solicitations toward high-benefit consuers, who suffer ore privacy har as they spend less on deflection. Overall, consuer welfare is higher with deflection than concealent. Finally, solicitations are excessive, and so, it is optial to ipose a charge on the. 2. Motivation A substantial literature in econoics and arketing analyzes how sellers copete to acquire custoers via advertising and price (Butters 1977, McAfee 1994, McGahan and Gheawat 1994, Baye and Morgan 2001, Chen and Iyer 2002, Iyer and Pazgal 2003, Chioveanu 2008). Separately, analytical privacy research has considered how arketers use personal inforation to screen consuers and effect price discriination (Chen et al. 2001, Taylor 2004, Acquisti and Varian 2005, Wathieu 2006, Hui and Png 2006). However, previous analytical research has ostly ignored the har that arketing iposes on consuers. Advertising and direct arketing (e.g., direct ail, telephone, and fax, and electronically) ipose inconvenience and other hars on consuers. Marketers do not internalize these hars, and so they over-spend on advertising and direct arketing relative to the socially optial level (Petty 2000, Drèze and Bonfrer 2005). Van Zandt (2004) and Anderson and de Pala (2006) consider heterogeneous sellers, which offer different products through direct arketing at fixed prices. Consuers can buy the ites only through the sellers essages, but ust incur costs to open the essages. In this scenario, an increase in the sellers arketing cost ay raise welfare by screening out low-quality sellers. The average essage quality would rise, and ore consuers would open their essages (Gantan and Spiegel 2004, Loder et al. 2006). In contrast, we ephasize heterogeneity aong consuers and arketing avoidance efforts by consuers to avoid advertising and solicitations. Motivated by the econoics of security (Koo and Png 1994, Ayres and Levitt 1998), we distinguish two fors of arketing avoidance: concealent and deflection. 1 We do not take any a priori position on the erits of arketing or consuer privacy, but rather, address the endogenous trade-off aong consuer surplus, privacy hars, consuers avoidance costs, and sellers arketing costs. 3. Setting Like Van Zandt (2004), Anderson and de Pala (2006), and Loder et al. (2006), we consider copetition aong N sellers to arket soe ite at a fixed price, p. Potential consuers can buy the ite only if solicited, and, in particular, they do not seek out sellers (Butters 1977, Grossan and Shapiro 1984, McAfee 1994, Van Zandt 2004, Anderson and de Pala 2006, Loder et al. 2006). They are of two types: H high types with individual deand q h p for the ite, and L low types with individual deand q l p < q h p. Both types of consuers suffer the sae har w fro each solicitation received and are risk neutral. Consuers can invest effort to conceal their addresses fro solicitations, for instance, by renting a post office box, registering with no-contact lists, and using an unlisted telephone nuber. Specifically, let the relative exposure of consuer j s address be k j = k j (1) where k j 0 represents her effort in concealent, k j satisfies 0 = 1 d dk j k j <0 and d 2 dk 2 j k j >0 (2) and the total exposure of consuer addresses is H L = k j + k i (3) j=1 where we use j to index high-type consuers and i to index low-type consuers. By (2), the total exposure has the reasonable property that, if all k j = 0 and k i = 0, then k j = 1 and k i = 1, and hence = H + L, i.e., all consuer addresses are copletely exposed. The consuer s cost of concealent is C K k j, where C K 0 = 0 d dk j C K k j >0 i=1 d 2 dk 2 j C K k j >0 (4) and dc K /dk j = 0atk j = 0. This cost does not vary with the nuber of solicitations. 1 This generalizes the concept of ad avoidance (Speck and Elliott 1997), which, in our fraework, is a for of deflection.

3 1096 Manageent Science 54(6), pp , 2008 INFORMS Consuers can also invest effort to deflect solicitations, for instance, through call screening, pop-up blockers, and spa filters. Conditional on being addressed, a consuer would receive solicitations at rate e j, where e j 0 represents her effort in deflection and 0 = 1 d de j e j <0 and d 2 de 2 j e j >0 2 (5) The consuer s cost of deflection is C E e j, with the sae properties as C K k j in (4). 3 On the seller side, given the total exposure of consuer addresses,, the cost to seller of soliciting S addresses is CS, where C0= 0 S CS >0 CS 0 2 S 2 CS >0 2 S CS 0 and C/S = 0atS = 0. The cost CS includes the cost of copiling custoer addresses and the cost of sending the solicitations. 4 We assue that both CS and C/S decrease with because it is easier for sellers to get addresses when the total exposure is larger. 5 For siplicity, we assue that the cost 2 In this paper receiving a solicitation eans that the consuer actually receives the essage, e.g., opens the junk ail, reads the e-ail, or listens to the telearketing call. 3 Both concealent and deflection encopass ultiple ethods with differing costs. For instance, ethods of concealent fro telearketing include registering with the do not call list, using an unlisted telephone nuber, and disabling caller nuber display on outgoing calls. These ethods should be ordered by increasing cost to confor with (4). Siilarly, ultiple ethods of deflection can be ordered by increasing cost. We assue that the costs of concealent and deflection are convex. Realistically, once the consuer invests soe effort in concealent or deflection, it becoes ore difficult for her to further raise avoidance (e.g., a spa filter ay screen out 95% of incoing spa, but to accurately filter the reaining 5% would require uch ore effort). 4 A U.S. Federal Trade Coission (2002) experient suggests that the arginal cost of copiling e-ail addresses varies with the source of addresses. Coission investigators seeded 250 e-ail addresses across the Internet and observed the following rates of spa: 86% of addresses posted to newsgroups, half of addresses posted on free personal Web pages, 27% of addresses posted to essage boards, and 9% of addresses listed in e-ail ebership directory. The different sources should be ordered to confor with the convex specification in (6). In a separate field experient, Hann et al. (2006) found that spa was targeted rather than being randoly addressed, which suggests that the arginal cost of sending spa is not zero. We use cost of solicitation to refer to all costs incurred in copiling custoer addresses and sending solicitations. 5 In the context of the U.S. Federal Trade Coission experient reported in Footnote 4, when consuers invest ore effort to conceal their e-ail addresses and hence reduce their total exposure, (6) of producing the ite is zero. To focus the analysis, we apply the following condition in this study: Profitability Condition. The arginal cost of solicitation, CS /S, is sufficiently low relative to the seller s increental argin fro high-type consuers, pq h p. The sequence of events is as follows: (i) sellers set price; (ii) consuers choose efforts in concealent and deflection; while siultaneously, sellers send solicitations (at this tie, they do not know the individual consuers types, but only the distribution in the total exposure (Butters 1977, Grossan and Shapiro 1984, McAfee 1994)); (iii) if a high-benefit consuer receives a solicitation, she purchases q h p units and derives consuer surplus V h p > 0; if she receives ultiple solicitations, she purchases fro one of the sellers at rando. We focus on a separating equilibriu in which sellers price the ite such that low-benefit consuers would not buy the ite even if solicited, that is, their surplus V l p 0. 6 To ensure that the analysis is tractable, we assue that consuers and sellers have rational expectations about the actions of each other and that they act syetrically Market Equilibriu 4.1. Consuer Concealent and Deflection Consider a high-type consuer. She would receive a particular solicitation if it successfully addresses her and gets her attention. Given her efforts in concealent and deflection, k j and e j, this would occur with probability k j e j, where k j is her probability of being drawn as defined in (1). Hence, given all sellers solicitations, S 1 S N, her probability of receiving at least one solicitation is equal to one inus the the seller would have to visit ore newsgroups, essage boards, etc., to find e-ail addresses, and within each newsgroup or essage board, it ay have to spend ore effort to traverse and process e-ail addresses (e.g., converting e-ail addresses that are stored as iage to text, or concatenating the doain naes that users deliberately break up). 6 All we need is that the low-type consuer s individual deand curve be sufficiently low relative to that of the high-type consuer. Realistically, any people have low willingness to pay for directly arketed products, such as counterfeit software and discounted Viagra. Hence, it ay not be profitable for sellers to slash prices to attract such low-type consuers. We discuss how purchases by low-type consuers affect our findings in 7. Fro this point onward, where it is not essential, we suppress the price arguent in the quantities q h p and q l p, and consuer surpluses, V h p and V l p. 7 The focus on syetric equilibria is coon to uch research in advertising and direct arketing (see, e.g., Grossan and Shapiro 1984, McGahan and Gheawat 1994, Meurer and Stahl 1994, Baye and Morgan 2001, Iyer and Pazgal 2003).

4 Manageent Science 54(6), pp , 2008 INFORMS 1097 probability of not receiving any solicitation. Accordingly, her expected surplus fro the ite is { 1 1 k j e j S =1 V h = 1 1 k j e j S 1+ +S N V h 8 (7) Figure 1 S Consuer Concealent and Seller Solicitation k h (S e h ) k l (S e l ) S(k l k h, e h ) She incurs har, w, fro every solicitation received, and so, her expected har is S(k h k l, e h ) S 1 + +S N k j e j w 9 (8) Recall that C K k j and C E e j represent the costs of concealent and deflection. Hence, by (7) and (8), the expected utility of the high-type consuer j is U h k j e j = 1 1 k j e j S 1+ +S N V h S 1 + +S N k j e j w C K k j C E e j (9) If U h k j e j is axiized at k j = 0 or e j = 0, then the high-type consuer would choose zero effort in concealent or deflection. Otherwise, she would choose positive efforts in concealent and deflection according to the first-order conditions, U h k j U h e j =S 1 + +S N e j d dk j 1 k j e j S 1+ +S N 1 V h w d dk j C K k j = 0 (10) =S 1 + +S N k j d de j 1 k j e j S 1+ +S N 1 V h w d de j C E e j = 0 (11) For low-type consuers, V l p < 0, and so they would not buy the ite. Hence, the expected utility of a low-type consuer i is siply U l k i e i = S 1 + +S N k i e i w C K k i C E e i (12) 8 We assue that it is possible for a consuer to receive ultiple solicitations fro the sae seller because the seller ay have copiled addresses fro different sources that contain duplicate entries, and also, the consuer ay have ultiple addresses (e-ail accounts, telephone nubers, etc.) and hence ay get the sae solicitations in each of these addresses. 9 The privacy har, w, can be interpreted as annoyance or the resources needed to dispose of solicitations, and hence we assue it applies to every solicitation. We are grateful to a reviewer for observing that each high-type consuer benefits only fro the first solicitation received, but suffers har fro all solicitations. Fro the deand for state-level do not call registries, Png (2007) estiated the har fro telearketing to range between $13.19 and $98.33 per household. S 0 0 k h The low-type consuer would choose positive levels of efforts in concealent and deflection according to the first-order conditions, U l = S k 1 + +S N e i w d d C i dk i dk K k i =0 (13) i U l = S e 1 + +S N k i w d d C i de i de E e i =0 (14) i Our first result shows that consuers efforts in concealent and deflection are strategic copleents (Bulow et al. 1985) with sellers solicitations. Intuitively, an increase in seller solicitation increases har to consuers, and so consuers will raise concealent and deflection. Proposition 1. Consuers efforts in concealent and deflection are strategic copleents with sellers solicitations. 10 Figure 1 shows the consuers efforts in concealent as functions of seller solicitations. By Proposition 1, the consuer effort in concealent is increasing in seller solicitation. Furtherore, by coparing (10) with (13), the high-type consuer derives ore surplus, and so she invests less effort in concealent. Hence, the high-type consuers concealent function lies to the left of the low-type consuers. The consuers deflection strategies are siilar For brevity, the proofs of all results are presented in the online appendix, which is provided in the e-copanion that can be found at For other suppleentary aterials, please refer to sg/ ipng/research/. 11 The shapes of the consuer concealent functions depend on the functional fors of C K k j and k j, but, for our purpose, they are not iportant. We introduce the broken curves later: they are sellers solicitations as a function of low-type (high-type) consuers concealent, holding deflection and high-type (low-type) consuers concealent constant. In principle, Figure 1 should have H + L + N diensions, but, for ease of presentation and without loss of generality, we draw the reaction functions of only one high-type consuer, k h, one low-type consuer, k l, and one seller, S. k l k

5 1098 Manageent Science 54(6), pp , 2008 INFORMS 4.2. Seller Solicitation Consider a high-type consuer j who has received a solicitation fro seller. If she also receives z other solicitations (whether fro seller or other sellers), she will buy with probability 1/z + 1 fro each of the received solicitations. Hence, she will buy fro that solicitation by seller with probability ( ) 1 S +S 1 k z+1 z j e j z 1 k j e j S +S 1 z (15) where S S 1 + +S 1 + S S N denotes solicitations by all other sellers. 12 To calculate seller s expected revenue fro arketing to that high-type consuer, we ust su over all the various possibilities, z = 0 1S + S 1, and take account of the probability that one of the solicitations fro seller is that solicitation, which equals the product of the probability that the hightype consuer s address is drawn, k j, her effort in deflection, e j, and seller s nuber of solicitations, S. Accordingly, taking into account the increental argin fro each high-type consuer, pq h, seller s expected revenue fro that high-type consuer alone is S +S 1 z=0 { ( ) 1 S + S 1 k z + 1 z j e j z 1 k j e j S +S 1 z k j e j S pq h = 1 1 k j e j S +S pq S + S h (16) by Lea 1 (presented in the online appendix). In syetric equilibriu, all k j = k h and e j = e h. Seller s expected profit is its expected revenue fro all consuers less the cost of solicitations. Seller s expected revenue fro all consuers is siply H ties (16). 13 Hence, substituting fro (6), seller s expected profit is S S = H1 1 k h e h S +S S S + S pq h CS (17) 12 The bases for (15) are that (i) sellers collectively sent S + S solicitations; (ii) the high-type consuer has received one solicitation fro seller ; and (iii) the high-type consuer receives z other solicitations, which are drawn binoially fro the reaining S + S 1 solicitations. 13 Note that low-type consuers do not buy the ite, and hence the expected revenue fro all consuers equals the expected revenue fro all high-type consuers. Accordingly, the first-order condition is { = H 1 k S h e h S +S ln1 k h e h S k S + S h e h S +S S pq S +S 2 h CS S =0 (18) Proposition 2. Sellers solicitation is a strategic substitute with high-type consuers efforts in deflection and concealent. Sellers solicitation is independent of lowtype consuers effort in deflection, and, if and only if the arginal cost of solicitation does not increase too fast with consuer concealent, then sellers solicitation is a strategic copleent with low-type consuers effort in concealent. A consuer s effort in concealent has two effects. First, it changes the ix of consuers in the total exposure,. Iplicitly, by changing the ix, concealent perfors a screening function for sellers. If low-type consuers increase effort in concealent, they reduce their exposure and hence enrich the proportion of high types. By contrast, if high-type consuers increase effort in concealent, they reduce their proportion in the total exposure. The other effect of concealent is to reduce the total exposure of all consuers,, which raises the seller s arginal cost of solicitation. If the arginal cost of solicitation is not too sensitive to consuer concealent, the screening effect outweighs the arginal cost effect, and so, concealent by low-type consuers is good for sellers. The iplication for direct arketers is obvious: deflection is bad, although concealent can be good. Indeed, the UK Direct Marketing Association supports consuer efforts to opt out of direct ail, telearketing, and fax arketing; the U.S. Direct Marketing Association also supports opt out of direct ail, telearketing, and e-ail arketing. Note that the converse of Proposition 2 also holds sellers solicitation is a strategic substitute with all consuers concealent effort if the arginal cost of solicitation increases too fast with consuer concealent. Hence, arketers should pay close attention to changes in technology and cost differences. For any ediu whose arginal cost of solicitation is sufficiently sensitive, consuer concealent is bad for sellers. Referring to Figure 1, the upward-sloping (downward-sloping) broken curve depicts seller solicitation as a function of low-type (high-type) consuer concealent effort, holding deflection efforts and

6 Manageent Science 54(6), pp , 2008 INFORMS 1099 high-type (low-type) consuer concealent effort constant Consuer-Seller Equilibriu Our setting is not trivial. Specifically, as proved in Lea 2 (presented in the online appendix), there exists an equilibriu in which sellers do send solicitations, and consuers do invest efforts in concealent and deflection. If high-type consuers axiize utility by choosing k j = 0 and e j = 0, then the equilibriu is defined only by sellers and low-type consuers, i.e., (18), (13), and (14). Otherwise, the equilibriu is defined by sellers and both types of consuers, i.e., (18), (10), (11), (13), and (14). Generally, we cannot rule out ultiple equilibria it is possible that the reaction functions of sellers and low-type consuers intersect ore than once. To ensure a unique equilibriu, we need to specify the third derivatives of the cost functions, C K k j, C E e j, and CS, the concealent function, k j, and the deflection function, e j. 5. Welfare and Policy Iplications We now analyze the endogenous trade-off between direct arketing and consuer privacy. Suing (9), (12), and (17) over the H high-type consuers, L lowtype consuers, and N sellers, in syetric equilibriu, social welfare siplifies to W = H1 1 k h e h S 1+ +S N V h + pq h N CS S 1 + +S N Hk h e h w =1 HC K k h HC E e h S 1 + +S N Lk l e l w LC K k l LC E e l (19) In Proposition 3, we characterize the ipact of concealent and deflection on the direct privacy har caused by solicitations. Surprisingly, concealent efforts by low-type consuers increase direct privacy har. They reduce their own har, but shift solicitations toward high-type consuers, who invest less effort in deflection, and so suffer relatively ore privacy har. 15 Overall, the total direct privacy har 14 The broken curves correspond to cross-sections of the seller solicitation function (which is a surface) with respect to consuer concealent and deflection. As with the consuer concealent functions, the shape of the seller solicitation function is not essential. The figure with seller solicitation and consuer deflection functions has only one (downward-sloping) solicitation curve because, by Proposition 2, seller solicitations are independent of low-type consuers effort in deflection. 15 It is worth noting that as high-type consuers receive ore solicitations, they also have a higher probability of getting the ite and enjoying a positive surplus, and so, the net benefit of low-type consuers concealent effort on the welfare of high-type consuers is abiguous. would increase. In contrast, deflection efforts and high-type consuers concealent effort unequivocally reduce the direct privacy har. Proposition 3. The direct privacy har caused by seller solicitations is decreasing in both consuer types deflection efforts and high-type consuers concealent effort, but increasing in low-type consuers concealent effort. Besides directly iposing privacy har, seller solicitations also indirectly induce consuers to incur costs of concealent and deflection. Coparing (17) with (19), there are three differences between a seller s profit and social welfare: Because we assued elastic deand, high-type consuers enjoy soe surplus, which is ignored by sellers. This causes sellers to send too few solicitations. Sellers ignore the direct privacy har caused by solicitations and concealent and deflection costs, and hence tend to send too any solicitations. Sellers ignore the deand that they take away fro other sellers, and hence tend to send too any solicitations. How then should sellers be induced to internalize the externalities that they ipose on consuers and other sellers? Microsoft s cofounder, Bill Gates, faously advocated a postage charge on e-ail to control spa (CNN.co 2004). 16 Our next result addresses how the charge should be set, and whether telearketing and direct ail should also be taxed. Proposition 4. The optial charge per unit of seller solicitation is positive. Furtherore, it is decreasing in the expected surplus of high-type consuers, and increasing in the direct privacy har caused by solicitations and the deand that sellers take fro each other. By contrast with a siple Pigouvian solution, the optial charge depends on the actions of the victis of the externality (i.e., consuers). Proposition 3 shows that the direct privacy har fro solicitations is decreasing in both consuer types deflection efforts. By Proposition 2, deflection by high-type consuers reduces sellers solicitations too. Hence, deflection reduces the optial charge. The ipact of concealent is not obvious by Proposition 3, concealent efforts by high- and lowtype consuers have different effects on the direct privacy har, and by Proposition 2, they also shift sellers solicitations in opposite directions. Hence, the net effect of consuer efforts in concealent on the optial charge depends on the balance between highand low-type consuers. 16 This suggestion is in line with Van Zandt (2004) and Anderson and de Pala (2006), who advocated raising counication costs to curb unsolicited prootions by low-quality sellers.

7 1100 Manageent Science 54(6), pp , 2008 INFORMS It is surprising that the optial charge is positive even when high-type consuers benefit fro solicitations. The essential reason is that the arginal cost of solicitation is so low relative to the seller s increental argin (the profitability condition) that solicitations are excessive. Spa very likely satisfies this condition, and hence Proposition 4 iplies that it should be subject to a tax. Whether telearketing and direct ail should also be taxed depends on whether these ethods of direct arketing satisfy the profitability condition. The optial charge also increases with the deand that sellers take fro copetitors. A seller s solicitations ay reach new custoers, and so expand the priary deand. However, they ight also reach custoers who have already received solicitations fro other sellers and so steal the other sellers custoers, which does not raise welfare. Finally, governents proote both concealent, such as no contact registries, and deflection, such as spa filters (see, e.g., the U.S. Senate Judiciary Coittee 2002). Which should they ephasize? Proposition 5 shows that, for consuer welfare, concealent is worse than deflection. Proposition 5. Effort in deflection raises consuer welfare ore than effort in concealent. Proposition 5 is intuitive. Both concealent and deflection reduce the likelihood of solicitations reaching a consuer. The key distinction is that concealent causes solicitations to be diverted to other consuers, whereas deflection causes solicitations to be discarded. When the arginal cost of solicitation is sufficiently low, sellers send excessive solicitations; hence, the arginal benefit of solicitations to high-type consuers is low. Accordingly, consuers are better off with solicitations being discarded than diverted. Note that Proposition 5 considers only consuer welfare. Any effort in concealent by low-type consuers raises seller profit as well, because it increases the effectiveness of solicitation. Essentially, the social choice between concealent vis-à-vis deflection resolves to a trade-off between the change in the expected utility of all consuers and gain in sellers profit. With the profitability condition, the sellers additional profit is outweighed by the direct and indirect externalities on consuers (even accounting for any increase in surplus), and so, deflection is preferable. Supposing that spa satisfies the profitability condition, Proposition 5 iplies that policy-akers should ephasize deflection (installing spa filters and arking coercial e-ails with the ADV tag) over concealent (using unlisted addresses and do not contact registries). Even in arkets that do not satisfy the profitability condition, consuers still prefer deflection to concealent if the direct privacy har is so large that high-type consuers choose positive effort in concealent. 6. Epirical Iplications Generally, paraeter changes have coplex equilibriu effects directly affecting one side of the arket and indirectly affecting the other side. Owing to the difficulty of equilibriu analysis in the general odel, we focus on the reciprocal-quadratic paraeterization, k j = 1 and e 1 + k j = 1 and (20) j 1 + e j { [ CS = ] cs 2 H + L C K k j = c K k 2 j and C Ee j = c E e 2 j (21) Table 1 presents epirical iplications in the case where only low-type consuers invest in concealent and deflection. We present the other case where all consuers invest in concealent and deflection in the online appendix. In 2003, the U.S. Federal Trade Coission established a national do not call list. This reduced consuers cost of concealent fro telearketing. According to Table 1, sellers would respond by increasing solicitations, as the total exposure of addresses becae richer in high-type consuers. Indeed, the Direct Marketing Association (2004, p. 29) reported: For those direct arketers whose priary objective was to solicit direct order sales, telephone arketing again produced the highest response rate (5.78%) Perhaps this was due to the institution of Do-Not-Call laws, leaving a saller, but ore productive base to proote to. [italics added] Varian et al. (2005) found that households with higher incoe were ore likely to sign up with the U.S. Do Not Call Registry. To the extent that the benefit fro direct sales and direct privacy har increase with household size and incoe, these findings are consistent with the predictions in Table 1. Table 1 Epirical Iplications Effect of an increase in On variable pq h H L c K c E w c N S +? + +? k l +? + +? e l +??? +?

8 Manageent Science 54(6), pp , 2008 INFORMS Extensions Our odel can be extended in several eaningful ways: (i) Multiple ites. We assued that sellers arket only one ite. It is straightforward to extend our analysis to arketing of ultiple ites, with each being arketed by a distinct group of sellers. The key is that consuers (endogenously) divide into ultiple segents that can be ordered by the aggregate surpluses fro consuing the ites. Then, the analysis of consuer net utility and seller profit extend in an obvious way. 17 (ii) Heterogeneous privacy hars. Our analysis assued that solicitations cause the sae direct privacy har to both consuer segents. Realistically, the direct privacy har caused by solicitations ight differ, because for instance, people differ in their opportunity cost of tie. Let the direct privacy hars to high- and low-type consuers be w h and w l. Then, by the sae analysis as leading to (9) and (12), as long as 1 1 k j e j S 1+ +S N V h S 1 + +S N k j e j w h S 1 + +S N k i e i w l (22) high-type consuers would derive ore benefit fro solicitations than low-type consuers. By constructing reaction functions siilar to (10), (11), (13), (14), and (18), the analysis is identical to that presented above. If, however, (22) does not hold, then high-type consuers would choose ore arketing avoidance than low-type consuers. Nevertheless, the results and conclusions are siilar. 18 (iii) Low-type consuers deand. We assued that the deand of low-type consuers was sufficiently low that sellers would price the ite such that V l p 0. What happens if this does not hold, and low-type consuers would buy the ite if they receive solicitations? In this case, as with (17), seller s 17 Specifically, suppose that there are Q products, with each product being offered by a distinct group of sellers. Each consuer is interested in a subset of the Q products. Then, we can construct consuers expected utilities in a siilar way as leading to (9), and, for each product, the seller s profit in a siilar way as leading to (17). Following the approach in 4, we can derive the strategic responses of sellers and consuers, and after ranking consuers by their expected utilities, we can derive the equilibriu. 18 In this case, high-type consuers would choose positive efforts in concealent and deflection in equilibriu, and hence Propositions 4 and 5 would hold even without the profitability condition. The other changes in findings are (i) in Figure 1, the high-type consuer s concealent curve would lie to the right of that for low-type consuers, and start fro the origin; (ii) in Proposition 3, the direct har would increase in high-type consuers effort in concealent, and decrease in low-type consuers effort in concealent. profit fro H high-type and L low-type consuers would be S = H1 1 k h e h S +S pq S + S h S S + L1 1 k l e l S +S pq S + S l CS (23) There are two changes in the findings. Regarding Proposition 2, sellers solicitation is a strategic substitute with all consuers efforts in deflection. If low-type consuers deand for the ite, q l p, is sufficiently low relative to high-type consuers, then sellers solicitation is a strategic substitute with hightype consuers effort in concealent and a strategic copleent with low-type consuers effort in concealent. If, however, q l p is large, then low-type consuers effort in concealent would reduce seller profit, which would induce sellers to decrease solicitation. That is, sellers solicitation would becoe a strategic substitute with low-type consuers effort in concealent. 19 Finally, regarding Proposition 4, the optial charge is also decreasing in the expected surplus of low-type consuers. (iv) Pricing. Our analysis can be extended to endogenize sellers pricing in either of two ways. One way supposes that each seller is subject to onopolistic copetition and sets price p before sending solicitations. Referring to (10), (11), (13), (14), and (18), let the equilibriu solicitations and avoidance be S k h e h k l e l. Then, in the prior stage, each seller axiizes expected profit by setting price according to: d dp S = d { H1 1 k dp h e h N 1S+S S pq N 1S +S h p CS (24) The other way to endogenize pricing supposes that sellers set prices and send solicitations at the sae tie under conditions of oligopoly. Then, sellers will randoize prices according to a set of distributions F y p over an interval, say p p (Varian 1980, Narasihan 1988, Raju et al. 1990, McAfee 1994). Each high-type consuer would buy fro the seller offering the lowest price aong the solicitations that she receives. The distribution of the lowest price aong a set of N price distributions is 1 y N 1 F y p. 19 Note, however, that this case is less epirically relevant, as it iplies that all consuers would buy the ite upon receiving solicitations fro sellers, which does not see realistic. The proofs of the changes in findings are presented in the online appendix.

9 1102 Manageent Science 54(6), pp , 2008 INFORMS Then, adapting (9), the expected utility of a hightype consuer becoes U h k j e j = 1 1 k j e j S 1 1 k j e j S y p p + + y=2 V h p d dp 1 1 F 1p dp 1 1 k j e j S y p V h p d { 1 1 F p dp y p dp S 1 + +S N k j e j w C K k j C E e j (25) Siilarly, by enuerating the various cobinations of solicitations that reach a high-type consuer and taking account of the sellers price distributions, and then siplifying with McAfee s (1994) Equation (5), an individual seller s profit at any price p is { p=h 1 1 k h e h S 1 k h e h S y + + y 1 1 k h e h S 1 1 F y p pq h p CS y { = H 1 1 k h e h S y k h e h S y F y p pq h p CS (26) In a syetric randoized-strategy equilibriu, S y = S and F y = F for all y, and the seller ust earn equal profit, p = p, for all p p p. Applying these conditions to (26) yields the price distribution 1 Fp= 1 1 k h e h S { 1 1 k h e h S [ pqh p pq h p ] 1/N 1 (27) Substituting (27) in (26), the seller s profit siplifies to p = H1 k h e h N 1S 1 1 k h e h S pq h p CS (28) Differentiating (28) with respect to S, and setting S = S, yields the equilibriu solicitations, S. With randoized pricing, we can prove results corresponding to Propositions 2 and 3. However, whether Propositions 1, 4, and 5 generalize to the setting of randoized pricing is an open question for future research. The key challenge is that, by (25), the expected utility of high-type consuers, U h k j e j, is an intractable function of sellers solicitations and price distributions Concluding Rearks Consuers widely avoid arketing to protect their privacy. Our contribution is to introduce the consideration of arketing avoidance into analytical research. Solicitations by sellers directly ipose privacy har on consuers, and indirectly induce consuer costs of concealent and deflection. We show that consuer concealent and deflection have distinct strategic and welfare iplications depending on the trade-off between the externalities caused by solicitations and the benefit provided by the arketed ite. Our results are subject to several liitations. First, the analysis with randoized pricing left open questions on the strategic copleentarity between consuer efforts in concealent and deflection with seller solicitations, and the welfare differences between concealent and deflection. These are key issues for future research. Second, our analysis above was static. It did not allow sellers to collect consuer inforation in one period and use it for subsequent pricing (see, e.g., Chen et al. 2001, Taylor 2004, Acquisti and Varian 2005). It also did not consider repeat purchases. Such dynaic interactions, in the context of negative externalities iposed by seller solicitations, are an iportant direction for future work. Third, we assued that consuers do not proactively contact sellers. It would be interesting to analyze a setting in which both sellers and consuers seek out each other (Robert and Stahl 1993). If interested consuers seek out sellers, sellers can reduce arketing, both saving resources and reducing consuers privacy costs. Such a setting, however, ay not fit arkets in which consuers are not aware of the ite being advertised. Finally, for analytical tractability, we restricted our analysis to syetric equilibria, hoogeneous 20 In previous analyses of randoized pricing in oligopoly (Varian 1980, Narasihan 1988, Raju et al. 1990, McAfee 1994), consuers were passive, and hence coputing this surplus was not an issue. One setting which possibly avoids this proble is where consuers coit to efforts in concealent and deflection before sellers set prices.

10 Manageent Science 54(6), pp , 2008 INFORMS 1103 sellers, and only two consuer types. Although soe of these issues have been separately considered in the literature (e.g., McAfee 1994, Van Zandt 2004, Anderson and de Pala 2006), integrating the into a single analysis reains a challenging issue for future research. 9. Electronic Copanion An electronic copanion to this paper is available as part of the online version that can be found at Acknowledgents An earlier version of this paper was circulated under the title Direct Marketing: Privacy and Copetition. The authors thank seinar participants at the University of Southern California Marshall School, INSEAD, Hong Kong University of Science and Technology, the Federal Trade Coission, Singapore Manageent University, the New York University Stern School, the University of Connecticut, the University of Auckland, the City University of Hong Kong, the University of Hong Kong, the University of Texas at Dallas, and Renin University of China. The authors especially thank Gerard Butters, the departent editor, the associate editor, and referees for very helpful advice and suggestions. This research was supported in part by funding fro the Singapore Ministry of Education, Grants R and R , and Hong Kong SAR Central Policy Unit and Research Grants Council, Project No. CityU 1001-PPR-3. References Acquisti, A., H. R. Varian Conditioning prices on purchase history. Marketing Sci Anderson, S. P., A. de Pala Inforation congestion. 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