The Economics of Social Data

A data intermediary acquires signals from individual consumers regarding their preferences. The intermediary resells the information in a product market wherein firms and consumers tailor their choices to the demand data. The social dimension of the individual data – whereby a consumer’s data are predictive of others’ behavior – generates a data externality that can reduce the intermediary’s cost of acquiring the information. The intermediary optimally preserves the privacy of consumers’ identities if and only if doing so increases social surplus. This policy enables the intermediary to capture the total value of the information as the number of consumers becomes large.