Online Privacy at a Premium

Online privacy has been a significant concern of customers in online transactions. Several technical, economics based, and regulatory mechanisms have been proposed to address online privacy. One proposed market-based mechanism is the privacy seal. In this paper, we present some empirical evidence of the impact of displaying a privacy seal on the product prices of online firms. Using data carefully collected on homogeneous products sold by pairs of online firms — one firm in the pair with a privacy seal, and the other firm without the seal — we find that firms with a privacy seal in fact do charge a price premium on their products, compared to firms without a seal. The amount of this price premium is affected by the product prices, but is not affected by the product demand. Based on the data, we also quantify the magnitude of this privacy seal induced price premium.