Consumer Privacy and the Future of Data-Based Innovation and Marketing

Artificial Intelligence, Privacy and Security and Innovation and Economic Growth

Article Snapshot


Alexander Bleier, Avi Goldfarb and Catherine Tucker


International Journal of Research in Marketing, Vol. 37, No. 3, pp. 466-480, September, 2020


Firms' use of consumer data for innovation and marketing can raise privacy concerns. Large incumbent firms may have an advantage over small or new firms in addressing privacy concerns.

Policy Relevance

Policymakers should be aware of tradeoffs between privacy and innovation.

Main Points

  • Firms use consumer data to develop and market new ideas for products and services in many sectors, including e-commerce, transportation, banking, and security; increasingly, startups rely on consumer data.
  • Firms’ use of data in ways unanticipated by consumers often triggers privacy concerns, but identification of consumer preferences that consumers themselves have not yet articulated is key to innovation; policymakers should recognize a tradeoff between privacy and innovation.
  • Small firms are more affected than large firms by privacy-related losses; the effect on small firms is strongest when the effect arising from the privacy concern is not immediate.
  • Small entrepreneurial firms and large incumbent firms are generally affected about the same when privacy concerns cause revenue losses.
    • Losses arise when consumers hesitate to buy from firms that fail to protect privacy.
    • Losses can also arise when consumers block ads or refuse to click on ads.
    • Losses might affect the stock market value of large firms more than small firms.
  • Large firms are better able to defend against privacy litigation than small firms.
  • "Data foreclosure" occurs when consumers hesitate to share information because of privacy concerns, or provide false information.
    • Large firms like Apple ameliorate the effect of data foreclosure by creating "walled gardens," within which all data is controlled by one entity.
    • Privacy concerns make firms less likely to share data with other firms, particularly new firms.
  • Privacy regulation affects innovation.
    • When firms must obtain consumers’ consent to use data, small firms with narrow offerings are disadvantaged compared to large firms offering a broad range of benefits.
    • EU privacy rules reduced venture capital funding of digital advertising, online news, cloud computing, and new technology firms generally.
  • Large firms can better influence legislation and regulatory behavior compared to small firms; also, large firms can afford the cost of compliance with regulation more easily than smaller firms.
  • Several factors mitigate the impact of privacy concerns on firms, including the following:
    • Trustworthiness, as consumers are less sensitive to data collection by firms they trust.
    • Cultural factors, as some consumers are less sensitive to privacy; for example, younger people are generally less concerned with privacy than older people.
  • Regulations in the EU may drive startups to other jurisdictions, harming the economy; policymakers should harmonize policy on entrepreneurship with privacy policy to give firms the right incentives.
  • Many questions relating to privacy and entrepreneurship are unanswered, such as the following:
    • How do privacy rules and litigation affect large firms compared to small firms and startups?
    • How does the lack of data about some individuals (such as the very poor) shape innovation?
    • What is the tradeoff between accuracy and privacy?

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