When Private Information Settles the Bill

It has been argued, that the amazing expansion that many digital markets, and especially the market for mobile smartphone apps, have seen over the past decade was fueled by the possibility to collect previously unseen amounts of user data.

For some these developments are a mixed blessing. While many of these data-driven digital services come apparently for free, they create enormous value and have the potential for offering better information flows, better choices, efficiency and increased welfare. On the other hand, widespread unease and loss of trust in the market could result when providers store too much personal data. Indeed, striking a balance between “too little” and “too much” privacy protection in digital technologies and markets poses a non-trivial challenge for regulators and society as a whole. While, the success of new digital technologies may greatly depend on the services’ ability to collect and analyze enough personal information, too much data collection may also carry significant societal risks, such as creating opportunities for greater surveillance.

A key question for better navigating this trade-off lies in understanding to which extent developers can collect data, rather than money, to subsidize the development of better and more widely adopted apps.

In their paper “When Private Information Settles the Bill: Money and Privacy in Google’s Market for Smartphone Applications” (Management Science, 2019, Volume 65, No. 8) Michael Kummer and Patrick Schulte provide the first large-scale empirical evidence on the money-for-privacy trade-off on both sides in the app market: They show how app developers trade greater access to personal information for lower prices, and consumers choose between lower prices and greater privacy. Using data from around 300,000 smartphone applications (“apps”) from Google’s Android Market, they document the extent to which private information resembles a second “means of payment” on both sides of the market for smartphone apps. To do so, they focus their analysis on three research questions:

  1. Do app developers request access to more sensitive data in exchange for lower prices?
  2. Do users avoid installing apps with permissions that access privacy-sensitive data?
  3. Are app users’ privacy concerns context dependent?

Their results suggest that:

(1)    App developers ask for more privacy-sensitive permissions if they offer a free app than if they offer a paid app;

(2)    Consumers take this trade-off into account and show up to 6 percent less demand for apps that ask for privacy-sensitive permissions;

(3)    the negative relationship between permissions and downloads depends on the app’s context. Factors such as (i) trust, (ii) the targeted user group (e.g., mature users) or the (iii) sensitivity of the app’s context (e.g., in health-related apps) moderate the relationship’s strength.

Their inference is based on a full cross section, on panel datasets, on “app siblings” consisting of a free and paid version of the same app, and on a difference-in-differences-style analysis of demand for apps. The results emerge consistently for both the supply and demand side across these different datasets and in various specifications. The findings are robust to using alternative measures of demand, other outcomes such as survival, different ways of measuring privacy-sensitive permissions, and considering subsegments of the market. They are also robust to an IV approach, or to identifying and accounting for category-specific permissions (e.g., running apps that need to track location). A second source of identification comes from a cross-platform comparison between Android and Apple’s iOS. Two online appendices contain additional supporting materials and cover the data in more detail. Taken together, these large number of robustness checks conveys a high level of confidence in their main findings.

Their paper is interesting to managers, because it suggests that private information can be negotiated between firms and consumers. Private information plays a critical role in this market, because it resembles a second “means of payment.” Documenting the trade-offs with respect to privacy-sensitive information for both firms and consumers is a first useful step in understanding the role of privacy in app markets. On the supply side, app developers ask for more privacy-sensitive permissions in exchange for a free app, or they offer a less privacy-sensitive app for a higher price. On the demand side, we observe fewer installations for apps that request more privacy-sensitive permissions. Together these results highlight a money-for-privacy trade-off in the market for mobile apps.

Carefully highlighting the money-for-privacy trade-off in the app market also matters for regulators, because it suggests a cost for greater privacy protection, independent of whether such protection is desired. Furthermore, the authors hope to inspire future research on this topic, or as Michael Kummer puts it: “Every policy implication that derives from our research can and should be validated with individual-level or experimental data. Such careful evaluation offers several fruitful avenues for further research. We are convinced that there are significant unleveraged potentials to further improve the performance of the app market, especially in sensitive categories.”

Read the full article at https://doi.org/10.1287/mnsc.2018.3132.


Kummer M and Schulte P (2019). When Private Information Settles the Bill. Management Science 65(8):3470–3494.