The Economics of Data Externalities

Abstract

I study a model of a firm that buys data from consumers. There are data externalities, whereby data of some consumers reveal information about others. I characterize data externalities that maximize or minimize consumer surplus and the firm’s profit. I use the results to solve an information design problem in which the firm chooses what information to collect from consumers, taking into account the impact of data externalities on the cost of buying data. The firm collects no less information than the efficient amount. In some cases, we can solve the firm’s problem using a two-step concavification method.