Andrew Odlyzko, AT&T Labs - Research, Florham Park, New Jersey

The increasingly comprehensive collection and processing of data about all our activities is a major public concern. Some security and cryptography technologies are designed to provide a countervailing influence to the steady erosion of privacy. On balance, though, most of the technologies being deployed, as well as ongoing research and development, for example in data mining and geographical location of users, serve to reduce privacy.

There is widespread concern about political aspects of the loss of privacy. However, most of the developments that reduce privacy are coming from corporations, which care about money, not politics. It is likely that what really motivates these enterprises (even though they often do not realize it clearly themselves) is not just the prospect of better targeted advertising. Rather it is the strong incentive to price discriminate, to charge different prices to different consumers for the same goods and services, that is the main stimulus for the increasingly comprehensive data collection efforts. This incentive is the result of the economics of the Internet, with high fixed and extremely low marginal costs. It is the same incentive that has led to the airline yield management system, with a complex and constantly changing array of prices. It is also the same incentive that led railroads to invent ingenious price and quality differentiation schemes in the 19th century. Privacy intrusions serve to provide the information that allows sellers to determine buyers' willingness to pay.

Economically, price discrimination is desirable, since it increases the efficiency of the economy. On the other hand, even airline yield management arouses strong opposition from the public. More direct forms of price discrimination face more substantial opposition, as Amazon.com discovered recently when it was caught practising a form of it.

The resolution of the conflict between sellers' incentives to price discriminate and buyers' dislike of price discrimination will have important consequences for which technologies will be adopted widely. Governments will likely play a role in controlling pricing. Sellers are likely to rely on personalized bundles, since those allow them to extract more consumer surplus and also to conceal the extent of price discrimination. Micropayments and auctions are likely to play a smaller role than is often expected.

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