Economics of Identity Management: A Supply-side Perspective Workshop on Privacy Enhancing Technologies Dubrovnik (Cavtat), Croatia 30 May – 1 June 2005 Institute for System Architecture Dresden, Germany Sven Koble & Rainer Böhme Kindly supported by FIDIS (“Future of Identity in the Information Society“) and the Workshop on Privacy Enhancing Technologies 2005

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 2 Overview  Supply-side Perspective  Why support an Identity Management System (IMS)  Analysis  Economic tradeoff  Comparison of different models  Scenario  Conclusion & Future Work

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 3 Why do vendors store privacy sensitive data ? Vendor Knowledge about the customer Direct marketing or Price discrimination € € Motivation

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 4 Motivation Why is protection of customers privacy important ? 65% declined to register at an e-commerce site: Harris Poll June 2004 Estimated loss of sale, because of missing privacy protection in the U.S. 2002: $18 Billion FTC 2000 Report to the U.S. Congress Doubts about company‘s privacy protections

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 5 Basics - IMS  IMS functions:  Manage own personal data  Different situation – different identities  Logging  Accountability – relative to pseudonyms  Important: Linking impossible  Between pseudonym – personal data  No purchase history  Vendor has to decide  Support an IMS, or keep processing customer data Source: Sebastian Clauß and Thomas Kriegelstein

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 6 Basics - Model All Customers  Assumptions: with privacy awareness without Maximise revenue without IMS use of an IMS demand f =

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 7 Models  Perfect price discrimination  Baseline model  Customer groups  One purchase period  Customer behaviour  Two purchase periods realistic 50 € 70 € 25 € purchase not purchase t2t2 t1t1

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 8 Model – One Purchase Period without IMSwith IMS Demand Revenue R Benefit > Cost A CB Price Quantity Price Quantity A C B D FE R = A + B + C R = A + C + D + Fhigh price R = C + F + B + Elow price D + F > B high price E + F > Alow price Case 1 Case 2 two inequation including the factor f yielding to

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 9 Model – One Purchase Period Intersection point gives max. value for f A + D < B + E  Case 2 A + D > B + E  Case 1 Max. value of f is root of a quadratic equation  Upper bound f = 1 Price Quantity CB D FE A C B D FE A Price Quantity

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 10 Models  Perfect price discrimination  Baseline model  Customer groups  One purchase period  Customer behaviour  Two purchase periods 50 € 70 € 25 € in any case: double demand required bound for worst case: double demand bound for worst case: increase demand by 50% purchase not purchase t2t2 t1t1

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 11 Scenario - One Purchase Period Publisher Monopoly for scientific journal Price depends on residence of the customer without IMS with IMS 20 € each 5 € each α = 4 π = 0.8 f > 6.25%  Introduction of an IMS profitable if demand increases by more than 6.25% π = € each € 400 € 6800 €

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 12 Future Work  Monopolist Competitive market  Allow arbitrage  More empirical data  Take other functions of an IMS into account € € €

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 13 Conclusion  Given privacy aware customers, the introduction of an IMS might be rewarded with higher demand  Factor f definded to quantify additional demand  Valueable information for developers of IMS about potential early-adaptors  The success of privacy-enhancing Identity Management Systems is not only determined by technical but also by economic conditions

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 14 Thank you for your attention

TU Dresden, Sven Koble & Rainer BöhmeEconomics of Identity Management: A Supply-side Perspective 15 References  Acquisti, A., Varian, H.: Conditioning Prices on Purchase History. (2001)  Gellman, R.: Privacy, Consumers, and Costs – How the lack of privacy costs consumers and why business studies of privacy costs are biased and incomplete, (2002)  Odlyzko, A.: Privacy, Economics, and Price Discrimination on the Internet. In: Fifth International Conference on Electronic Commerce, ACM (2003)  Privacy and Identity Management for Europe (PRIME)  Shapiro, C. and Varian, H.: Information Rules: A Strategic Guide to the Network Economy. Harvard Business School Press (1998)  Taylor, C. R.: Private Demands and Demands for Privacy: Dynamic Pricing and the Market for Customer Information. Department of Economics, Duke University, Duke Economics Working Paper (2002)