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

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

Additional information

Notes on contributors

Ai-Mei Chang

AI-MEI CHANG ([email protected]) is professor of systems management at the Information Resources Management College, National Defense University, in Washington, DC, where she teaches courses on electronic commerce and multimedia systems. She has a B.S. in computer science, a B.S. in mathematics, and a Ph.D. in management information systems from Purdue University. Dr. Chang’s research interests include electronic commerce, with particular emphasis on information brokering, design of intelligent agents for electronic commerce processes, cooperation support systems, and multimedia systems. She has published articles in Communications of the ACM, IEEE Transactions on Systems, Man, and Cybernetics, IEEE Transactions on Engineering Management, Decision Support Systems, Journal of Organizational Computing and Electronic Commerce, and Information Processing and Management. Before joining National Defense University, Dr. Chang was on the faculty of the University of Arizona, Tucson. She has worked on consulting projects dealing with software maintenance in U.S. Army organizations, and is on the editorial review boards of Decision Support Systems and Journal of Organizational Computing and Electronic Commerce.

P.K. Kannan

P.K. KANNAN ([email protected]) is associate professor of marketing at the Smith School of Business, University of Maryland. He received his PhD. from Purdue University. His primary research interests are in marketing research and marketing modeling. His research on competitive market structures, consumer loyalty, variety-seeking, and reinforcement behaviors, and the effects of promotions on competition have appeared in Marketing Science, Management Science, Journal of Business Research, and International Journal of Research in Marketing. His current interests center around marketing of information products, such as market research, software, and data products using the traditional channels and electronic channels, such as the Internet, covering issues of strategy, pricing, and product reliability. Articles focusing on these issues have appeared, or are forthcoming, in Communications of the ACM, International Journal of Electronic Commerce, and the Handbook of Electronic Commerce. Dr. Kannan is a member of the American Marketing Association, the Institute of Management Science, and the American Statistical Association. He has corporate experience with Tata Engineering and Ingersoll-Rand, and has consulted for such companies as Frito-Lay, Pepsico, and Fannie Mae. Before joining the University of Maryland, he was on the faculty of the University of Arizona, Tucson.

Andrew B. Whinston

ANDREW B. WHINSTON. For biographical information, see “The Design and Development of a Financial Cybermarket with a Bundle Trading Mechanism” in this issue.