Should Firms Share Information About Expensive Customers? An

Advances in information technology increasingly allow firms to identify expensive, high-cost customers, who are not only individually less profitable for firms but also raise the average marginal cost incurred by firms and thus impose a negative externality on inexpensive customers. Should competing firms share information that identifies such customers? The answer to this question has important implications for firm profitability, consumer welfare, and privacy laws that currently constrain firms ’ ability to share information. Considering consumers to be heterogeneous in terms of the cost they impose on firms, this paper presents an analytical model to examine the conditions in which two differentiated Bertrand competitors prefer to share information. The firms ’ incentives to share information differ according to the degree of product differentiation, the relative proportion of expensive customers in the market, the relative marginal cost of selling to expensive customers and the level of noise in the information. When firms sell substitutable products a Prisoner’s Dilemma results. The competing firms unilaterally benefit from sharing information, but the benefits from reneging on a