The Economics of Freebies in Exchange for Consumer Information on the Internet: An Exploratory Study

Ai-Mei Chang, P.K. Kannan, and Andrew B. Whinston
International Journal of Electronic Commerce,
Volume 4, Number 1, Fall 1999, pp. 85.

Abstract: A recent phenomenon in Internet advertising is the evolution of Web-based organizations that provide free e-mail services, or promotional rebates, or even cash to “qualified” on-line consumers who are willing to interact with them and view the advertisements. In order to qualify for such free services, consumers provide information on their demographics, life-styles, and preferences for products/services. The organizations use the information to target interactive advertisements of their corporate clients to the appropriate users. Different terms have been used to describe the concept, but from a business transaction viewpoint, these Web-based organizations act as intermediaries in collecting information from the consumers, paying for the information using freebies, and, in turn, selling it to corporate clients. Recently, several such “cybermediaries” have been the subject of takeovers by Microsoft and other Internet “portal” organizations. This paper describes the various business models that have been adopted by these cybermediaries, examining the economic issues of the models and the implications for consumer welfare. The continued viability of the market is explored in light of recent concerns regarding breaches in privacy of consumer information. Finally, the impact of different schemes used for pricing advertisements on the business models adopted by the organizations is discussed.

Key Words and Phrases
: Economics of consumer information, intermediaries, e-communities, marketing research, pricing of advertisements.