Electronic Commerce Research and Applications 22 (2017) 24–41

Contents lists available at ScienceDirect

Electronic Commerce Research and Applications

journal homepage: www.elsevier.com/locate/ecra

Adoption of big data and analytics in mobile healthcare market: An

economic perspective
Jing Wu a,⇑, He Li b, Ling Liu a, Haichao Zheng a
a
School of Economic Information Engineering, Southwestern University of Finance and Economics, China
b
Fogelman College of Business & Economics, The University of Memphis, United States

a r t i c l e i n f o a b s t r a c t

Article history: This paper investigates the impact of big data and analytics (BDA) on health IT market competition as
Received 20 February 2016 well as health IT provider’s optimal BDA adoption decisions. To capture the specific characteristics of
Received in revised form 21 December 2016 BDA in healthcare, we simultaneously model BDA’s healthcare efficiency and privacy risk from consumer
Accepted 19 February 2017
perspective and BDA’s benefit and cost from provider perspective in a stylized two-dimensional product
Available online 22 February 2017
differentiation framework. The results indicate firm’s optimal pricing strategies with the dynamic of
BDA’s efficiency and privacy risk. In addition, BDA’s influence on firms’ outcomes and social welfare
Keywords:
are analytically pointed. Theoretically, this study has potentials to provide foundations for future big data
Big data and analytics
Wearable devices
research by stylizing an analytical model to understand firm’s BDA adoption. Practically, insights for busi-
Healthcare ness managers on how to optimize strategies of BDA adoption, and for social planners on how to conduct
Two-dimensional product differentiation better policies to improve healthcare service quality by promoting BDA adoption in healthcare, are
Efficiency derived.
Privacy Ó 2017 Published by Elsevier B.V.

1. Introduction by HealthCore, together with its own clinical-trial data, to guide

Big data and analytics (BDA) is making large impacts in various
fields, including retail, finance, and social networks, etc. (Gandomi
and Haider, 2015). In healthcare sector, BDA has shown distinctive
advantages on improving healthcare efficiency. BDA can recognize
individuals’ healthcare conditions, identify risks for serious health
problems, and provide personalized healthcare services, etc. (Chen
et al., 2012; Gandomi and Haider, 2015; Ghani et al., 2014). In addi-
tion, BDA also has potentials to reduce healthcare cost by identify-
ing healthcare resources waste, providing closer monitoring, and
increasing healthcare efficiency (Chen et al., 2012; McAfee and
Brynjolfsson, 2012). McKinsey & Company estimated that making
the full use of big data in healthcare could account for $300 billion
to $450 billion savings in healthcare spending1. The value of big
data already has been captured by some healthcare leaders. For
instance, a four-year partnership between AstraZeneca and Health-
Core was established. AstraZeneca makes use of the data provided
⇑ Corresponding author at: School of Economic Information Engineering, South-
western University of Finance and Economics, No. 555 Liutai Ave, Wenjiang,
Chengdu 611130, China.
E-mail address: kaitlynwu@swufe.edu.cn (J. Wu).
1 2
http://www.mckinsey.com/insights/health_systems_and_services/the_big-data_
revolution_in_us_health_care.
optimal R&D investment decisions.
In the process of BDA implementation in healthcare sector,
wearable devices are proved to be a better data source depending
on its natural advantages in healthcare and its popularity. The
healthcare wearable devices can collect and transform continuous
real-time healthcare data and reveal unseen scanning and sensory
features (Chan et al., 2012). According to the report of Institute for
Information Industry, the worldwide wearable device market
reached $6 billion dollars in 2014, and is expected to be $20.6 bil-
lion dollars in 20182. Currently, wearable devices are widely used in
healthcare field. The fitness monitors, such as Fitbit, Jawbone, Gar-
min, and Suunto, are designed for the users to monitor daily health-
care conditions. In addition, some healthcare wearable device
providers are making efforts on researching new devices with med-
ical functions. For instance, Apple has interest in blood monitoring
through skin and medical sensor-laden devices, which aims to ana-
lyze glucose levels via a person’s tears.
With the development of BDA and wearable technologies, a
new wave of revolution is under way in healthcare sector. Wear-
able devices collect and transform continuous real-time large
amount of healthcare data. At meanwhile, by using BDA technol-
http://go.gigaom.com/rs/gigaom/images/wearable-computing-the-next-big-
thing-in-tech.pdf.

http://dx.doi.org/10.1016/j.elerap.2017.02.002
1567-4223/Ó 2017 Published by Elsevier B.V.
 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41
ogy to analyze massive quantities of real-time healthcare informa-
tion generated from wearable devices, medical professionals have
potentials to be well equipped to solve healthcare problems. For
example, in the project of Parkinson’s disease treatment collabo-
rated by Intel, Amazon Web Services and Michael J. Fox’s charity,
smart watches gather and transmit real time personal health data.
Then, the data are transformed to the BDA platform built by Intel,
which finally deploys on a cloud infrastructure, Amazon Web Ser-
vices, to allow scientists to do further research. According to the
prediction of ABI Research3, the spending on bringing the data col-
lected from the wearable devices into healthcare BDA will grow to
$52 million by 2019.
Although healthcare data generated from healthcare wearable
devices is critical to BDA’s success in healthcare sector, the privacy
issue will continue to be a major concern in BDA implementation
in healthcare. BDA technology generates higher privacy concern
for consumers (Fabian et al., 2015) and increases privacy risks
(Barocas and Nissenbaum, 2014; Kshetri, 2014). First, the large
amount and concentration of data stored by healthcare organiza-
tions make it more appealing for hackers. In addition, in order to
provide personalized services, some tracking tools should be
employed to build a detailed database of personal information,
which increases consumer’s privacy risks. Moreover, a higher vari-
ety of information makes it more difficult to protect information
through the combination of structured and unstructured data from
different sources. Furthermore, organizations are more likely to
lack internal capacity and technologies to protect the information
during the peak data collection in BDA implementation process.
Privacy, including anonymity and security, plays more and
more important role in our life. The anonymity feature generally
helps individuals maintain their individuality and autonomy,
which is required by our physical and emotional well-being. The
privacy security is sometimes associated with functional benefits
of privacy protection. Very commonly today, the usage of Social
Security Numbers or account numbers and passwords is touted
as ‘‘privacy protection” and legally limited, because these data
breaches often involve financial security. However, with the devel-
opment of Internet technologies, our personal privacy faces more
risks. For instance, the U.S. government issued a bulletin on
November 2014 to warn iPhone and iPad users about the ‘‘Masque
Attack” vulnerability, which can allow malicious third-party iOS
Apps to masquerade as legitimate apps through its enterprise pro-
vision profiles4. This program would be used to steal user’s personal
information including bank accounts and passwords. In addition,
ICANN is also hacked by Phishing on December 20145, which caused
the breaches of workers’ personal data including phone number,
user names and passwords, E-mail addresses, and mail addresses.
Therefore, both BDA’s healthcare efficiency and personal pri-
vacy protection are essential for consumers. The implementation
of BDA in healthcare will bring more privacy risks for consumers
with the increase of healthcare efficiency. In addition, by effec-
tively using consumer data, the investment of BDA would bring
additional benefits for wearable device firms. However, the adop-
tion of BDA is also costly for firms. They not only need to imple-
ment related hardware (i.e., Hadoop clusters or Cloud platform)
and software (such as distributions provided by Cloudera and Hor-
tonworks), but also should hire or train employees with related
skills (such as Apache Hadoop, Pig, Hive, HBase, and Spark). Hence,
firms also face the benefit-cost trade-off in terms of BDA adoption.
3
https://www.abiresearch.com/press/integrating-consumer-wearable-health-
devices-will-/.
4
http://www.macrumors.com/2014/11/13/us-government-masque-attack-warn-
ing/.
5
http://www.computerworld.com/article/2860408/icann-data-compromised-in-
spearphishing-attack.html.
25
Therefore, we are curious about the question that whether health
IT (healthcare wearable device) providers should adopt BDA strat-
egy in the presence of consumer’s efficiency-privacy trade-off and
firm’s benefit-cost trade-off. Furthermore, how does BDA’s effi-
ciency and privacy risk affect the competition in healthcare wear-
able device market?
To model the impacts of BDA technology in healthcare, we
regard the influences of BDA on consumers as both perceived
healthcare efficiency improvement and perceived privacy loss
(Kim and Lee, 2009), because BDA increases healthcare efficiency
and privacy risk at the same time. In addition, we also consider
BDA’s benefit and cost for the firm with BDA strategy in the analyt-
ical model. Both consumers’ different tastes toward various prod-
ucts (choosing the product that closely matches their tastes) and
preference on BDA’s privacy risk (consumers always prefer the pro-
duct with lower BDA’s privacy risk) are considered. In summary,
under the two-dimensional product differentiation framework
(Wattal et al., 2009), we model BDA’s efficiency and privacy risk
for consumers and BDA’s benefit and cost for firms in a duopoly
competition between the healthcare wearable device firms.
Our analysis shows how firms should strategically adjust their
pricing strategies according to the change of BDA’s efficiency and
privacy risk in the competition. We also conduct the welfare anal-
ysis to investigate the effect of these two factors. This study has
potentials to provide theoretical contributions for the big data
research. We investigate the effects of BDA’s specific factors,
healthcare efficiency and privacy risk, on its adoption in healthcare
sector, by developing a stylized two-dimensional product differen-
tiation model. In addition, BDA’s benefit and cost for firms and
BDA’s efficiency and privacy risk for consumers are all considered
in the model. This approach provides some guidelines for future
big data theoretical research. Moreover, this research provides the-
oretical insights for privacy concern studies, which contrasts to
prior related studies from behavioral perspectives. Furthermore,
our results not only make guidelines for business managers to con-
duct optimal competition strategies and make proper decisions on
their product design, but also guide social planners to make poli-
cies to promote big data adoption and provide better healthcare
services.
The rest of this paper is organized as follows. Section 2 reviews
some related literatures. We present the baseline model in Sec-
tion 3, which is followed by a model extension to investigate firm’s
optimal BDA strategy in Section 4. A practical analysis of Jawbone’s
market competition and BDA strategy was provided in Section 5.
The conclusion, theoretical and practical implications, limitations,
and future research are shown in Section 6.
2. Literature review
2.1. Wearable devices and health information systems
Current literature about healthcare wearable devices can be
divided into three main categories: technological advancement,
consumer behaviours, and commercial operations of wearable
devices in healthcare field. Observing the unique advantages of
wearable devices on effectively delivering real-time healthcare ser-
vices (Chan et al., 2012), the first group of studies focus on the
development of specific healthcare wearable technologies for cer-
tain purpose (George et al., 2013; Markovic et al., 2013; Moran
et al., 2013; Zheng et al., 2014). Different from the technological
studies of healthcare wearable devices, the second stream of
related literature investigated consumers’ behaviours such as
adoption intention toward healthcare wearable devices. They
find that factors such as perceived ease of use, perceived
usefulness (Claes et al., 2015; Hensel et al., 2006), privacy calculus
26 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41
(i.e., perceived benefit versus perceived privacy risk) (Gao et al.,
2015; Li et al., 2016), gender (Zhang and Rau, 2015), experience,
and individual awareness (Rauschnabel et al., 2015) significantly
affect individuals’ intention to adopt a certain kind of healthcare
wearable devices.
Except for these related researches from technological and con-
sumer perspective, the third group of studies consider wearable
devices market competition from product provider perspective.
Given that studies in this field are quite sparse, and the economic
phenomenon of healthcare wearable devices is still under-studied
(Li and Wu, 2014; Wu et al., 2015), we focus on the market compe-
tition among healthcare wearable devices providers. Among the
limited researches, Wu et al. (2015) investigated the impact of con-
sumers’ heterogeneous preferences toward BDA’s efficiency-
privacy trade-off on wearable device providers’ optimal adoption
of BDA technology in their business. Li and Wu (2014) studied
the influences of network externality and product compatibility
on the healthcare wearable device market competition. However,
the impacts of consumers’ perceived privacy loss and providers’
intrinsic benefits generated from BDA, as well as providers’ optimal
adoption of BDA technology, are still not clear. Therefore, we inves-
tigate healthcare wearable device providers’ optimal adoption
decisions toward BDA, by addressing consumers’ efficiency-
privacy trade-offs and providers’ benefit-cost trade-offs associated
with BDA technology in a stylized two-dimensional product differ-
entiation framework.
Broadly, this study is also related to prior literature about health
IT provider’s optimal strategy from economic perspective. By
developing a game-theoretical model, Ozdemir et al. (2011)
explored the incentives for healthcare providers to adopt electronic
health record (EHR) and the potential role of personal health
record (PHR) in facilitating healthcare data sharing. Their findings
suggest that healthcare service providers do not have incentives to
share patient’s healthcare information, but an independent PHR
platform will creates enough incentives for healthcare providers
to share healthcare data. Huang et al. (2014) investigated the opti-
mal information security investment of HIS by stylizing an analyt-
ical network model. They find that only when the potential loss of
security events reaching certain critical value, organizations would
only spend a fraction of intrinsic security investment on HIS. How-
ever, these studies only analyzed firm’s optimal behaviours from
benefit-cost perspective. Different from these works, we also con-
sider BDA’s influence on healthcare efficiency and privacy risk from
consumer perspective in addition to the benefit-cost trade-off of
firms. In addition, we focus on an understudied field – healthcare
wearable device firm’s BDA adoption decision, which contrasts to
prior related studies.
2.2. Big data and analytics in healthcare
As an emerging technology, the definition of big data is still
evolving. At the beginning, size is the most important aspect to
describe big data (Gandomi and Haider, 2015). By observing the
importance of Volume (i.e., the magnitude of data), Variety (i.e.,
the structural heterogeneity in a dataset), and Velocity (i.e., the
speed of data generation and analysis) in data management, these
dimensions have emerged as the original common framework to
define big data (Chen et al., 2012; Kwon et al., 2014). Currently,
researchers have added more dimensions in the framework of
big data definition, such as Velocity, Variability, and Complexity,
to capture other related characteristics of big data (Kshetri,
2014). The sub-process of extracting useful information from big
data is widely known as BDA, which consists of text analytics,
audio analytics, video analytics, social media analytics, and
predictive analytics (Gandomi and Haider, 2015).
Most extant related studies have conceptually defined the con-
cept of big data and BDA (Gandomi and Haider, 2015), stated the
benefit and privacy generated by BDA (Baesens et al., 2014;
Kshetri, 2014), investigated the strategies for BDA implementation
(Heitmueller et al., 2014; Wang et al., 2015), and analyzed the chal-
lenges associated with BDA (Kshetri, 2014). However, the theoret-
ical and empirical analysis of BDA-related issues is quite sparse.
Wu et al. (2015) analytically investigated the impacts of consumer
preferences on firms’ optimal BDA adoption in healthcare context.
Tambe (2014) empirically indicated the influences of labor market
factors on organizations’ BDA investments by using the LinkedIn
data. Kwon et al. (2014) empirically investigated factors that
would affect firm’s adoption of BDA from behavioral perspective.
They proved that perceived benefit of internal and external data
usage, degree of data consistency and completeness, and resource
facilitating condition significantly influence firm’s adoption of BDA.
Therefore, we are going to study the motivation as well as conse-
quences of firms’ BDA adoption decisions through a quantitative
way.
Given that data in today’s biomedical research and practice has
been growing exponentially due to the advancement of related
technologies (such as DNA sequencing) and the healthcare digitiza-
tion process (such as the adoption of EHR and PHR) (Wu et al.,
2015), we set the research context as healthcare sector. BDA is
proved to be an effective way to manage and utilize the extremely
large amount of healthcare data (Timothy, 2013; Ward et al.,
2014). Based on BDA’s capabilities on integrating massive health-
care data with advanced technological infrastructures (Costa,
2014; Timothy, 2013), BDA has shown distinctive advantages on
improving healthcare outcome and reducing healthcare cost. Cur-
rently, researchers have made continuous technological efforts
on making full use of BDA in healthcare, ranging from the control
and prevention of HIV/AIDS (Jokonya, 2014) and the clinical rele-
vance identification among different diseases (Lin et al., 2011), to
the healthcare personalization (Chawla and Davis, 2013). Different
from these technological studies of BDA in healthcare, we are going
to provide a theoretical framework to explain when firms should
invest in BDA technology in healthcare sector. The analytical model
is expected to provide theoretical foundations for future BDA
study.
2.3. Information privacy in healthcare
With the spread of emerging technologies such as mobile com-
puting, sensor technologies, and social media, a larger amount of
individual information could be collected, stored, transformed,
analyzed, and re-used (Chen and Zhang, 2014; Hashem et al.,
2015; Kshetri, 2014). Although business players are beneficial from
strategically using these personal data, issues related to the protec-
tion or sharing of personal information are emerged (Gandomi and
Haider, 2015; Sharma and Crossler, 2014). Extant researches about
information privacy have theoretically and empirically investi-
gated price discrimination based on consumers’ heterogeneous pri-
vacy concerns (Jeong and Maruyama, 2009; Jing, 2011),
connections between information privacy and marketing tech-
niques such as market segmentation, couponing, price promotion,
and consumer addressability (Chen and Iyer, 2002; Conitzer et al.,
2012), antecedents and consequences of consumers’ information
privacy concern (Dinev et al., 2013; Smith et al., 2011; Wang and
Wu, 2014), and the market for personal data transformation (Goh
et al., 2011, 2015), etc.
Among these information privacy studies, two sub-streams of
researches are highly relevant to this work. The first group of
researchers have analytically studied firm’s optimal strategy in
the presence of consumer privacy concern. Kim and Lee (2009)
employed a vertical differentiation model to study the web-based
 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41
customer service quality competition in the presence consumer
privacy concern. They found that a firm with inferior ability in col-
lecting customer information to provide personalization is influ-
enced by consumer privacy concern more than the firm with
superior ability in utilizing customer information. Wattal (2007)
analyzed the optimal personalization strategy such as the scope
of personalization in the presence of consumer privacy concern
by stylizing the horizontal differentiation model. However, these
studies only have examined the effects of privacy concerns from
one-dimensional product differentiation, horizontal or vertical dif-
ferentiation. In contrast, we consider the role of privacy concern in
a stylized two-dimensional differentiation model.
In the second related sub-stream, researchers have investigated
the effects of privacy concern on consumer’s intention to adopt
health IT. Li et al. (2014) suggested that general privacy concern
positively affects consumer’s perceived privacy risk of PHR.
Bansal et al. (2010) asserted that health information privacy con-
cern has significant influence on consumer’s trust in the healthcare
website and intention to disclose health information. Ramanathan
et al. (2013) found that privacy protection and invasiveness are the
primary factors that influence young users’ use of mobile health.
Furthermore, researchers also have discussed the impact of big
data on consumer privacy and personal data security from qualita-
tive perspective (Barocas and Nissenbaum, 2014; Kshetri, 2014).
Since all these studies about privacy concerns in healthcare or
big data context are behavioral-oriented studies, our analytical
work has potentials to provide theoretical foundations for privacy
research in these emerging contexts.
2.4. Two-Dimensional product differentiation
Following the definition of Lancaster (1971) about product dif-
ferentiation type, horizontal differentiation reflects the variety of
product, and vertical differentiation reflects quality of product.
The combination of horizontal and vertical (two-dimensional) dif-
ferentiation not only captures the reality better, but also provides
additional insights that could be overlooked in one-dimensional
model (Wattal et al., 2009). Since Caplin and Nalebuff (1991)
proved the equilibrium existence of two-dimensional differentia-
tion model, it has been adopted in various settings. Telang et al.
(2004) measured the competition in search engine market by
adopting a stylized two-dimensional differentiation model.
Wattal et al. (2009) modelled the personalization characteristics
in the framework and study firm’s optimal personalization and
quality investment. Zhu and Zhou (2012) investigated the compe-
tition between open source and proprietary software in the frame-
work of two-dimensional differentiation. However, the impact of
consumer’s privacy concern on the stylized two-dimensional pro-
duct differentiation framework is still under-studied. To provide
a more comprehensive understanding of privacy concerns in pro-
duct differentiation theory, we propose an alternative way to
model privacy concerns in a stylized two-dimensional product dif-
ferentiation model.
3. The model
We adopt a two-dimensional product differentiation model
(Tirole, 1988; Wattal et al., 2009) to study healthcare wearable
devices competition. Consumers’ preferences for healthcare wear-
able devices are multi-dimensional, ranging from product design
to firm’s reputation. In particular, similar with other fitness soft-
ware or applications, consumers take care of the functionality of
the products. Whether the products can satisfy their general and
unique fitness demands is one of their criteria to make adoption
decision. In addition, given that healthcare wearable devices are
27
sensor-based, which requires consumers to wear them in 24 h,
comfort and fashion are also highly considered by consumers. Fur-
thermore, different consumers have heterogeneous reorganization
of specific brand when they select an ideal healthcare wearable
device. Due to the constraints of organizations’ budget and innova-
tion capabilities, their products generally perform well in some
certain dimensions. Besides, consumers have heterogeneous cogni-
tive assessment of various dimensions of different products. There-
fore, we summarize these characteristics as firms’ horizontal
differentiation, which reflects consumers’ heterogeneous prefer-
ences over different firms’ products.
In this study, we investigate the competition in a duopoly
healthcare wearable devices market with two differentiated firms:
Firm 1 and Firm 2. Consumers are assumed to be uniformly dis-
tributed on the Hotelling (1929) line depending on their prefer-
ences. The consumer who has more preferences on Firm 1’s
product locates near 0, and the consumer who values more about
Firm 2’s product locates near 1. Here, consumers’ preferences on
different firms’ products are multi-dimensional, but they are corre-
sponding to firms’ product strategy. For instance, in the real case of
the competition between Fitbit (denoted as Firm 1) and Jawbone
(refers to Firm 2), different potential consumers have heteroge-
neous preferences on the appearance of the product. Consumers
who prefer a wider and rectangular device (i.e., Fitbit) locates near
0, and others who prefer a slimmer and flat (i.e., Jawbone) product
locates near to 1. For another example, Fitbit Charge 2 (denoted as
Firm 1) and Samsung Gear Fit 2 (denoted as Firm 2) are well
rounded fitness trackers, and compete with each other on the mar-
ket6. Fitbit Charge 2 has a tapping feature on a black and white OLED
screen. Samsung Gear Fit 2 uses a larger AMOLED screen with the
vibrant colors and touch screen function. Different potential con-
sumers have heterogeneous preferences on the industry design of
the product. Consumers who prefer the black and white screen with
side buttons’ navigation (i.e., Fitbit Charge 2) locate near to 0, while
other consumers who value more of a larger touch screen with
vibrant colors (i.e., Samsung Gear Fit 2) locate near to 1. Therefore,
the differences between two competing firms could be some other
dimensions such as functionality and firms’ reputation. Such differ-
ences will finally cause consumers’ preferences on different prod-
ucts, which lead to the horizontal differentiation.
We assume that Firm 1 and Firm 2 offer product of price p1 and
p2 on the location of 0 and 1 on the Hotelling (1929) line, respec-
tively. Each consumer incurs a fit cost when she purchases a pro-
duct, which is increasing in the distance between her ideal
location (x) and the product’s actual location (x
). If we define t
as the unit fit cost, the consumer’s fit cost is T ¼ tjx  x
j.
Then, we model the effects of BDA on consumer’s utility for
healthcare wearable devices. On one side, BDA increases the qual-
ity of healthcare wearable device. BDA technology holds the pro-
mise of making effective usage of the larger quantities of data to
support a wide range of healthcare functions, including the disease
surveillance, clinical decision support systems, and individual
healthcare management. We introduce a term of BDA efficiency
to measure firm’s effort on BDA implementation. Thus, consumers
can obtain an additional utility of dv when adopting a wearable
device with BDA. On the other side, BDA also increases consumer’s
perceived information privacy risk. BDA has the tendency and
potential to extract extra information beyond the regular health-
care data. In addition, the re-identification is more likely to be
achieved by using BDA technology. Based on a consumer’s real-
time and large amount healthcare data, marketers can get more
healthcare and general information of consumers (Kshetri, 2014).
6
For a more comprehensive comparison between Fitbit Charge 2 and Samsung
Gear Fit2, you might access the page of https://www.wareable.com/fitness-trackers/
samsung-gear-fit2-vs-fitbit-charge-2.
28 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41

We assume that the adoption of BDA in healthcare wearable device obtain firms’ optimal prices (i.e., sub-game perfect Nash equilib-
causes a consumer privacy loss a. Prior empirical studies prove rium) by solving the first-order condition of profits on prices. In
that individuals exhibits different feeling toward privacy risk the second step, we compare firms’ optimal profits under different
(Sharma and Crossler, 2014; Yoo et al., 2012). Some individuals cases to analyze the conditions for the firms’ adoption of BDA. In
have less privacy concerns due to their unawareness of risk related the following sections, we first consider the case that one of the
to information disclosure. But others may care more about infor- firms adopt BDA strategy (i.e. Firm 1 adopts BDA), and later discuss
mation privacy because of previous privacy invasion experiences. the cases that no firm adopts BDA and both of the firms adopt BDA
Hence, we use a parameter h to denote consumer’s preference to analyze firms’ optimal decisions about BDA adoption by employ-
(consumer type) on privacy risk caused by BDA, which is assumed ing a game-theoretical method.
to be uniformly distributed over a unit line, i.e. h 2 ½0; 1. Therefore,
the coordinates of ðx; hÞ in the plane represents a consumer’s posi- 3.1. One of the firms adopt BDA strategy
tion towards the product.
We also assume each consumer has a reservation utility v for 3.1.1. Horizontal dominance differentiation
the devices, and v is sufficient large so that the market is fully cov- When Firm 1 adopts BDA strategy while Firm 2 does not adopt
ered. Furthermore, we assume each consumer only buy one pro- it, the net utilities for a consumer located at ðx; hÞ from purchasing
duct due to budget. Therefore, the net utility for a consumer the Firm 1 (u1 ) and Firm 2 (u2 ) are given as
located at ðx; hÞ from purchasing the product with BDA is
u1 ¼ ð1 þ dÞv  ha  tx  p1
u ¼ ð1 þ dÞv  ha  T  p; and the net utility from purchasing the ð1Þ
product without BDA is u ¼ v  T  p. u2 ¼ v  tð1  xÞ  p2
Consumer’s decision about purchasing the product depends on By letting u1 ¼ u2 , the indifference line is given as
their net utilities from two firms. They will choose the product that
p2  p1 þ dv þ t  2tx
brings them more net utilities. The indifference line is defined as hðxÞ ¼ ð2Þ
the set of consumers who have the same net utilities for two a
products. As shown in Fig. 1(a), the indifference line intersects h ¼ 0 and
According to prior two-dimensional product differentiation lit- h ¼ 1 at x1 and x2 , respectively. Mathematically,
eratures (Wattal et al., 2009), the market structure can be divided
p2  p1 þ dv þ t p2  p1 þ dv þ t  a
into horizontal dominance and vertical dominance to describe x1 ¼ ; x2 ¼ ð3Þ
2t 2t
which dimension is more preferred by consumers (Fig. 1). This
classification depends on the location of indifference line. If the Thus, firms’ demand functions q1 and q2 are given as
market is horizontal dominance as shown in Fig. 1(a), the indiffer- 1 1
ence line intersects both h ¼ 0 and h ¼ 1, and each firm captures q1 ¼ ðx1 þ x2 Þ; q2 ¼ ð1  x1 þ 1  x2 Þ ð4Þ
2 2
consumers located near to him for all values of h. Consumer’s pref-
erence on product fit dominates her utility. However, in vertical Accordingly, the decision problems for two firms are given as
dominance as shown in Fig. 1(b), the indifference line intersects x1 þ x2
maxp1 ¼ ðp1  c þ kdÞ   md  F;
both x ¼ 0 and x ¼ 1. One firm captures consumers with higher p1 ;p2 2
preference on BDA’s privacy loss, and the other firm captures con- 2  x1  x2
sumers with lower preference on BDA’s privacy loss. Therefore, p2 ¼ ðp2  cÞ  F ð5Þ
2
consumer’s preference on BDA’s privacy loss dominates her utility.
There are no Nash equilibriums lies in other regions when the s:t:0 6 x1 6 1; 0 6 x2 6 1 ð5aÞ
indifference line intersects with vertical and horizontal line some-
The constraints of Eq. (5a) are used to guarantee the market
where in between.
structure is indeed horizontal dominance. In other words, the
In healthcare wearable devices market, firm’s revenue mainly
indifference line should intersect h ¼ 0 and h ¼ 1 at the interval
comes from selling the product. Each firm burdens both of mar-
of [0, 1] (i.e., 0 6 x1 ; x2 6 1). Solving the pricing game, we obtain
ginal cost and the fixed cost for producing wearable devices. We
the equilibrium given as Lemma 1.
assume a constant marginal cost c and fixed cost F. Then, we model
the effects of BDA investment on firm’s benefit and cost. On one
Lemma 1. When one of the firms adopt BDA, in the horizontal
side, firm’s initiative of BDA requires a critical investment that pos-
dominance, the sub-game perfect Nash equilibria for the firm with
itively associate with BDA efficiency. We assume the BDA imple-
BDA (ph1 ; qh1 ; ph1 ) and without BDA (ph2 ; qh2 ; ph2 ) are given as
mentation cost is md, where m is the unit cost on BDA efficiency.
In addition, firms also can collect more consumer data by employ-
2ðv  2kÞd  a 2ðv þ kÞd þ a
ing BDA technology. These data can be sold or strategically used to ph1 ¼ c þ t þ ; ph2 ¼ t þ c þ ;
gain more profit. This kind of benefit is positively associated with
6 6
the amount and quality of data collected by BDA platform, and 2ðv þ kÞd  a þ 6t 2ðv þ kÞd þ a þ 6t
these two terms are reflected by consumer quantity (q1 ) and BDA qh1 ¼ ; qh2 ¼ ;
12t 12t
efficiency (d), respectively. Hence, firm 1’s benefit from BDA adop-
½2ðv þ kÞd  a þ 6t
tion can be described as kdq1 , where k is the unit benefit of useful 2
consumer data. Therefore, the profit of the firm with BDA is ph1 ¼  md  F;
72t
p ¼ ðp  c þ kdÞq  md  F; and the profit of the firm without
½2ðv þ kÞd þ a þ 6t
2
BDA is p ¼ ðp  cÞq  F, in which q is the market share. ph2 ¼  F;
We develop a two-stage game to seek the Nash equilibriums 72t
under different scenarios (Tirole, 1988). In the first stage, wearable under the condition of 2a  3t 6 ðv þ kÞd 6 3t  a and a 6 2t.
device firms make decisions about BDA adoption. In the second According to Lemma 1, the main factors that would influence
stage, the competing firms simultaneously decide their product competitive firms’ optimal prices, demands, and profits can be
prices by optimizing their expected profits. Backward induction divided into two categories: benefit factors and cost factors. Con-
method is employed to solve the equilibriums. Specially, we first sumer’s reservation utility (v ), BDA’s unit benefit for firms (k),
 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41
Fig. 1. The Market Structure.
and BDA efficiency (d) form the group of benefit factors. Con-
sumer’s fit cost (t), BDA’s privacy loss (a), and unit cost on BDA effi-
ciency (m) belong to the cost factors group. Thus, conducting a
cost-benefit analysis of BDA adoption would be sufficient to under-
stand BDA’s influence on the competition. Considering the fact that
these factors in the two groups are all related to BDA’s efficiency or
privacy loss, we mainly analysis the effects of these two factors on
the equilibrium as shown in Corollary 1. In addition, firms also
transfer their marginal costs into the product prices. The fixed cost
of producing wearable devices also decreases firms’ optimal
profits.
Corollary 1(a). When one of the firms adopt BDA, in the horizontal
dominance, BDA efficiency (d) (1) positively affects the price of the
firm with BDA (p1 ) if and only if v > 2k; (2) always increases the
market share of the firm with BDA (q1 ); (3) has positive influence on
the profit of the firm with BDA (p1 ) when BDA efficiency is large
v þkÞ
(d > 18tmð6taÞð ); and (4) always negatively influence the price
2ðv þkÞ
2
(p2 ), market share (q2 ), and profit (p2 ) of the firm without BDA
strategy.
Corollary 1b. When one of the firms adopt BDA, in the horizontal
dominance, BDA’s privacy risk (a) (1) has negative influences on the
price (p1 ), market share (q1 ), and profit (p1 ) of the firm with BDA
strategy; and (2) positively affects the price (p2 ), market share (q2 ),
and profit (p2 ) of the firm without BDA strategy.
Corollary 1 demonstrates that both firms will strategically
adjust their prices due to the change of BDA’s healthcare efficiency
and privacy risk under horizontal dominance. Facing a higher BDA
efficiency, the firm without BDA strategy would decrease its price.
However, the firm with BDA strategy adjusts its price according to
the relationship between BDA’s influence on firms and consumers.
When the investment of BDA technology brings more unit benefit
for consumers than firms a lot (i.e., v > 2k), the firm with BDA
strategy increases its price after observing a higher BDA efficiency.
Otherwise, it will decrease its price when BDA efficiency is larger if
BDA technology does not benefits consumers more than firms a lot
(i.e., v < 2k). The intuition is that: if BDA technology has a large
unit benefit (k) for firms, the firm with BDA strategy does not need
to charge more on its product to gain more profit. When it refers to
BDA’s privacy risk, the firm with (without) BDA strategy will
charge less (more) if BDA generates a larger privacy risk. The rea-
son is that BDA’s privacy risk decreases consumer’s utility for the
healthcare wearable device with BDA. Thus, the firm with BDA
strategy can decrease its price to increase its consumer’s utility
so that to attract more consumers. The same explanation is also
suitable for the action of the firm without BDA strategy.
In addition, BDA’s efficiency and privacy risk also directly affect
firms’ optimal demands in horizontal dominance. BDA efficiency
29
performs as an advantage for the firm with BDA strategy, since it
can brings consumers more utilities for the product with BDA.
Thus, BDA efficiency helps the firm with BDA strategy to take some
consumers from the rival. On the contrary, BDA’s privacy risk
brings a disadvantage for the firm with BDA strategy since it
decreases consumer’s utility for the product with BDA. Some con-
sumers of the firm with BDA strategy would finally purchase from
the firm without BDA strategy when BDA’s privacy risk is
increased. Therefore, the firm with (without) BDA strategy would
enjoy a higher market share if BDA efficiency is increased
(decreased) or BDA’s privacy risk is decreased (increased).
Firms’ adjustment of prices and consumers’ change of purchase
based on the dynamic of BDA’s efficiency and privacy risk would
finally affect firms’ optimal profits. When BDA efficiency is
increased, the firm with BDA strategy would gain a higher market
share (q1 is increased) and a higher benefit from BDA (kd is
increased), its revenue thus is increased, meanwhile, it also bur-
dens a higher cost on BDA efficiency (md is also increased). Hence,
only when BDA efficiency is higher than a certain threshold
aÞðv þkÞ
(d > 18tmð6t
2ðv þkÞ2
), it would increase the profit of the firm with
BDA strategy. The threshold in turn is positively related to the val-
ues of unit cost on BDA efficiency (m), fit cost (t), and BDA’s privacy
risk (a). However, the firm without BDA strategy will charge less
and seek a lower market share if BDA efficiency is increased, it thus
enjoy less profit in equilibrium. When it refers to the effects of
BDA’s privacy risk, if BDA’s privacy risk is increased, the firm with
(without) BDA strategy would enjoy a lower (higher) profit since it
sets a lower (higher) price and gains less (more) consumers.
3.1.2. Welfare analysis under horizontal dominance
The above analysis indicates the effects of BDA’s efficiency and
privacy risk for providers. We then investigate the impacts of BDA
adoption by analyzing the dynamics consumer surplus and social
welfare. In the horizontal dominance differentiation, the consumer
surplus for the firm with BDA (CS1 ) and the firm without BDA (CS2 )
are given as
R1 R xðhÞ
CS1 ¼ 0
dx 0
½ð1 þ dÞv  ha  tx  p1   dh
R1 R1 ð7Þ
CS2 ¼ 0
dx xðhÞ
½v  tð1  xÞ  p2   dh
In equilibrium, the results of consumer surplus in this case are
given as
CSh1 ¼ a½ðv þkÞdþ2ð
8t
v cÞ3t ½ðv þkÞd2aþ3t½7ðv þkÞd2aþ12ðv cÞ15t
þ 72t
ð8Þ
CSh2 ¼ a½3ðv þkÞd24t
aþ6ðv cÞ9t
þ ½ðv þkÞdþa3t½5ðv þkÞd aþ12ðv cÞ15t
72t
The results demonstrate that the benefit perspective factors
(consumer utility, BDA’s unit benefit for firms, and BDA efficiency)
and cost perspective factors (fit cost, BDA’s privacy loss, and mar-
ginal cost) not only affect firms’ outcomes, but also significantly
influence consumer surplus. Following the same reason as provider
30 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41
perspective analysis, we also focus on the effects of BDA’s effi-
ciency and privacy risk on consumer surplus. The results are sum-
marized in Corollary 2.
Corollary 2. When one of the firms adopt BDA, in the horizontal
dominance, (1) BDA efficiency (d) positively affect both firms’
consumer surplus (CS1 and CS2 ) when BDA efficiency is large (i.e.,
v cÞ6t a12ðv cÞ
d > 7a12ð
14ðv þkÞ
for the firm with BDA and d > 30t13
14ðv þkÞ
for the
firm without BDA); (2) BDA’s privacy risk (a) increases the consumer
surplus of the firm with BDA (CS1 ) if BDA’s privacy risk is large
(a > 7ðv þkÞdþ6ðv cÞ7t
), but it increases the consumer surplus of the firm
8 9a
without BDA (CS2 ) when it is small (a < 13ðv þkÞdþ30ð
8
v cÞ39t
).
Corollary 2 shows that facing an increased BDA efficiency in
horizontal dominance, both firms’ consumers would receive more
utility surplus when BDA efficiency is higher than a certain thresh-
old. The threshold is positively (negatively) related to BDA’s pri-
vacy risk for the consumers of the firm with (without) BDA
strategy. The reason is that BDA’s privacy risk performs as a disad-
vantage for the firm with BDA strategy, but it is beneficial for the
firm without BDA strategy in horizontal dominance. On the con-
trary, if BDA’s privacy risk is increased, the consumers of the firm
with (without) BDA strategy can obtain more utility surplus when
BDA’s privacy risk is higher (lower) than a certain threshold (which
in turn is positively related to BDA efficiency).
Furthermore, we analyze the influence of BDA adoption on
social welfare (the total consumer surplus and producer surplus).
The effects of BDA on consumer surplus in different cases are not
reported due to space limit. In equilibrium, the social welfare can
be expressed as W h ¼ CSh1 þ CSh2 þ ph1 þ ph2 , where CS represents
consumer surplus. The effects of BDA efficiency and privacy risk
on social welfare in this case are given as Corollary 3.
Corollary 3. When one of the firms adopt BDA, in the horizontal
dominance, BDA’s efficiency has the positive influence on social
v ct þ 9tm ;
welfare when BDA’s efficiency is large, i.e., d > a12
20ðv þkÞ 2
5ðv þkÞ
and privacy risk also has the positive influence on social welfare when
privacy risk is large, i.e., a > ðv þ kÞd  12ðv  cÞ þ 16t.
Corollary 3 demonstrates the condition when BDA’s efficiency
and privacy risk can increase social welfare in horizontal dominance
differentiation. When other things equal, the more efforts on BDA
initiative, the higher BDA’s efficiency and privacy risk would be gen-
erated. According to the results, when BDA’s efficiency and privacy
risk are higher than certain thresholds, social welfare would be
increased by the higher level of BDA implementation. The threshold
for each factor (BDA’s efficiency or privacy risk) in turn is positively
influenced by the other factor. Therefore, an insightful suggestion for
BDA adoption from social welfare perspective is that: social planners
should make policies to promote firm’s higher level of BDA imple-
mentation if the market is horizontal dominance.
3.1.3. Vertical dominance differentiation
In vertical dominance differentiation as shown in Fig. 1(b), the
decision problems for two firms are given as
h1 þ h2
maxp1 ¼ ðp1  c þ kdÞ   md  F;
p1 ;p2 2
2  h1  h2
p2 ¼ ðp2  cÞ  F
2 BDA’s privacy risk is increased, the firm with BDA strategy would
s:t:0 6 h1 6 1; 0 6 h2 6 1
The constraints of Eq. (6a) are used to guarantee the market
structure is indeed vertical dominance. Solving the pricing game,
we obtain the equilibrium given as Lemma 2.
Lemma 2. When one of the firms adopt BDA, in the vertical
dominance, the sub-game Nash equilibria for the firm with BDA
(pv1 ; qv1 ; pv1 ) and without BDA (pv2 ; qv2 ; pv2 ) are given as
ðv  2kÞd þ a ðv þ kÞd þ 2a
pv1 ¼ c þ ; pv2 ¼ c þ ;
3 3
ðv þ kÞd þ a ðv þ kÞd þ 2a
qv1 ¼ ; qv2 ¼ ;
3a 3a
½ðv þ kÞd þ a ½ðv þ kÞd þ 2a
2 2
pv1 ¼  md  F; qv2 ¼  F;
9a
under the condition of 3t  a 6 ðv þ kÞd 6 2a  3t and a P 2t.
Lemma 2 shows the optimal prices, demands, and profits of
firms in vertical dominance differentiation. Compared with the
equilibriums in horizontal dominance differentiation as shown in
Proposition 1, firms’ outcomes are no longer influenced by con-
sumer’s fit cost. The reason is that consumer’s utility is dominated
by her preference on BDA’s privacy risk. Her preference on product
fit thus is covered by BDA’s privacy risk in some degree. Other fac-
tors from both of cost and benefit perspectives also significantly
affect firms’ performance. The impacts of BDA’s efficiency and pri-
vacy risk in the vertical dominance are shown in Corollary 4.
Corollary 4a. When one of the firms adopt BDA, in the vertical
dominance, BDA efficiency (d) (1) positively affect the price of the firm
with BDA (p1 ) when v > 2k; (2) always increases the market share of
the firm with BDA (q1 ); (3) has positive influence on the profit of the
firm with BDA (p1 ) if and only if BDA efficiency is large
(d > 9am2aðv2þkÞ); and (4) always negatively influence the price (p2 ),
2ðv þkÞ
market share (q2 ), and profit (p2 ) of the firm without BDA strategy.
Corollary 4b. When one of the firms adopt BDA, in the vertical dom-
inance, BDA’s privacy risk (a) (1) has positive influences on both firms’
prices (p1 ; p2 ); (2) negatively affects the market share of the firm with
BDA (q1 ) and positively impacts the market share of the firm without
BDA (q2 ); (3) increases the profit of the firm with BDA strategy (p1 ) if
a < 2  ðv þ kÞd; and (4) increases the profit of the firm without BDA
strategy (p2 ).
The effects of BDA efficiency on firms’ optimal prices,
demands, and profits in vertical dominance as shown in Corol-
lary 4 (a) are the same as the corresponding results in Corollary
1 (a). Thus, when BDA efficiency is changing, firms have the
same strategies to adjust their prices, and they would also
receive the same changes of demands and profits as in horizon-
tal dominance differentiation. Due to the space limitation, we do
not repeat the explanations here. However, the threshold for the
impact of BDA efficiency on the profit of the firm with BDA
strategy is changed. It is no longer related to consumer’s fit cost.
Instead, the threshold depends on the values of BDA’s benefit
(v þ k), the unit cost of BDA efficiency (m), and BDA’s privacy
risk (a). The main reason is that consumer’s preference on pro-
duct fit is covered by BDA’s privacy risk in some degree, since
her preference on BDA’s privacy risk dominates her utility in
vertical dominance differentiation.
Compared with the effects of BDA’s privacy risk on firms’ equi-
libriums in horizontal dominance as shown in Corollary 1 (b), there
are two different results in vertical dominance case. First, when
ð6Þ
also increase its price in this case. The intuition is that: different
ð6aÞ
from the role of BDA’s privacy risk in horizontal dominance, it per-
forms more as a factor that can increase service differentiation.
BDA’s privacy risk no longer always regarded as a disadvantage
for the firm with BDA strategy, it is also considered as a tool that
 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41 31

can increase the differentiation between firms. Second, due to the Dey et al. 2014; Wu et al., 2015), the baseline parameters for the
change of the pricing strategy of the firm with DBA strategy, it also simulation are: v ¼ 0:5; d ¼ 0:3; k ¼ 0:2; c ¼ 0:1; t ¼ 0:1;
has change to gain more profit when BDA’s privacy risk is m ¼ 0:05; and F ¼ 0:01 7. The simulation results are shown in Fig. 2.
increased. When BDA’s privacy risk is lower than a certain thresh- Fig. 2 shows the effects BDA’s privacy risk on social welfare in
old (a < 2  ðv þ kÞd), it would positively affect the profit of the vertical dominance differentiation. The results indicate that BDA’s
firm with BDA strategy. The threshold in turn is negatively deter- privacy risk increases social welfare if and only if it is lower than a
mined by the total benefit of BDA (the sum of BDA’s unit benefit certain threshold. This result about BDA’s impact on social welfare
for consumers and firms, which is expressed as ðv þ kÞd). is inversed when it compared with the results in horizontal domi-
nance differentiation. The reason is that BDA’s privacy risk plays
3.1.4. Welfare analysis under vertical dominance different roles in horizontal and vertical dominance differentiation.
Then, we also analyze the dynamics of consumer surplus in ver- It is only beneficial for the firm without BDA strategy in horizontal
tical dominance. In this case, the consumer surplus for the firm dominance, but it performs as advantage for both firms in vertical
with BDA (CS1 ) and the firm without BDA (CS2 ) are given as dominance differentiation.
R1 R hðxÞ
CS1 ¼ 0
dx 0
½ð1 þ dÞv  ha  tx  p1   dh 3.2. No firm adopts BDA strategy
R1 R1 ð12Þ
CS2 ¼ 0
dx hðxÞ
½v  tð1  xÞ  p2   dh
When no firm adopts BDA, the competition is to be a classic
In equilibrium, the results of consumer surplus in this case are Hotelling (1929) game. In equilibrium, both firms set the price of
given as its marginal cost, i.e., p
1 ¼ p
2 ¼ c þ t. As a result, each firm shares
a half of the market (q
1 ¼ q
2 ¼ 1=2), and gains the same level of
CSv1 ¼ ½ðv þkÞdþa½ðv þkÞd
6a
aþ2ðv cÞt
ð13Þ optimal profit (p
1 ¼ p
2 ¼ t=2  F).
CSv2 ¼ ½ðv þkÞd2a½2ðv þkÞdþ4 a6ðv cÞþ3tþ3t 2

18a
3.3. Both firms adopt BDA strategy
The results indicate that the benefit perspective factors (con-
sumer utility, BDA’s unit benefit for firms, and BDA efficiency)
When both firms adopt BDA, since different firms have various
and cost perspective factors (fit cost, BDA’s privacy loss, and mar-
abilities to implement BDA technology, we assume that the firms
ginal cost) not only influence firms’ outcomes, but also signifi-
have different investments on BDA efficiency and generate differ-
cantly affect consumer surplus. Following the same reason as
ent privacy risk for consumers. We use ðd1 ; a1 Þ and ðd2 ; a2 Þ to
provider perspective analysis, we also focus on the effects of BDA’s
denote the BDA efficiency and privacy risk of two firms. We
efficiency and privacy risk on consumer surplus. The impacts of
assume d1 > d2 and a1 > a2 without loss of generality. Solving
BDA efficiency are summarized in Corollary 5.
the same pricing game as the case when one firm adopts BDA,
we obtain the equilibria given as Lemma 3 and Lemma 4.
Corollary 5. When one of the firms adopt BDA, in the vertical
dominance, BDA efficiency (d) increases the consumer surplus of the
  Lemma 3. In the horizontal dominance, the equilibrium when both
v cÞ
firm with BDA strategy (CS1 ) if it is large d > t2ð
2ðv þkÞ
, but it firms adopt BDA is given as
increases the consumer surplus of the firm without BDA strategy (CS2 )
 
when it is small d < 8aþ3t6ð v cÞ
4ðv þkÞ
. 2ðd1  d2 Þv  ða1  a2 Þ  2kð2d1 þ d2 Þ
p
1 ¼ c þ t þ ;
6
Corollary 5 shows the dynamics of consumer surplus with 2ðd1  d2 Þv þ ða1  a2 Þ  2kðd1 þ 2d2 Þ
p
2 ¼ c þ t þ ;
respect to the change of BDA efficiency in vertical dominance. Dif- 6
ferent from the results in horizontal dominance, the consumers
who purchase from the product without BDA would obtain more 2ðv þ kÞðd1  d2 Þ  ða1  a2 Þ þ 6t
q
1 ¼ ;
utility surplus from the increase of BDA efficiency if and only if 12t
BDA efficiency is lower than a certain a threshold (which in turn 2ðv þ kÞðd1  d2 Þ þ a1  a2 þ 6t
q
2 ¼ ;
is positively related to BDA’s privacy risk). The intuition is that: 12t
the consumers of the firm without BDA strategy are more benefi-
½2ðv þ kÞðd1  d2 Þ  ða1  a2 Þ þ 6t
2
cial from a lower BDA efficiency, since they have not chosen to
p
1 ¼  md1  F;
enjoy the BDA technology. In addition, compared with the results 72t
½2ðv þ kÞðd1  d2 Þ þ a1  a2 þ 6t
2
in horizontal dominance as shown in Corollary 2, the threshold
for the firm with BDA strategy is no longer determined by BDA’s q
2 ¼  md2  F;
72t
privacy risk. The main reason is that BDA’s privacy risk increases
under the condition of 2ða1  a2 Þ  3t 6 ðv þ kÞ
the service differentiation between firms in vertical dominance,
ðd1  d2 Þ 6 3t  ða1  a2 Þ and a1  a2 6 2t.
and it is not just a kind of disadvantage for the firm with BDA
Lemma 3 demonstrates that when both firms adopt BDA strat-
strategy.
egy, firm’s BDA efficiency and BDA’s privacy risk have the same
We also analyze the influence of BDA adoption on social welfare
effects on its own and the rival’s prices, demands, and profits as
in vertical dominance. In equilibrium, the social welfare is
W v ¼ CSv1 þ CSv2 þ pv1 þ pv2 . The same as the results in horizontal
dominance, BDA efficiency would increase social welfare when it 7
Consistent with previous literature (e.g., Anderson Jr. et al., 2014; Dey et al. 2014;
aðv þkÞ
is larger than a certain threshold (i.e., d > 9am2
5ðv þkÞ2
) in vertical Wu et al., 2015), we use the relative value to simulate the baseline parameters in
which the values range between 0 and 1. Relative values in the simulation can be
dominance differentiation. easily scaled to larger numbers without the loss generality. Thus, it is widely used in
However, the closed-form solutions for the effects of BDA’s pri- previous numerical simulation literature. In addition, the fixed cost (F) is quite low.
vacy risk on social welfare in vertical dominance are too complex Intuitively, unit benefit of BDA (k) is higher than the unit fit cost and marginal cost.
Therefore, after considering the equilibrium conditions under each scenario, we select
to solve. We therefore conduct a numerical simulation to show these parameter values in the simulations. A series of other sets of parameter values
how BDA’s privacy risk affects social welfare in this case. Consis- are also used to test the robustness of the simulation results, which are not reported
tent with the previous literature (e.g., Anderson Jr. et al., 2014; due to the space limitation, but are available upon request.
32 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41

Table 2
The Conditions for Each Scenario.

Firm 2 Firm 1
Do Not Adopt Adopt
Do Not Adopt Y 1 < 0&Y 2 < 0 Y 1 > 0&Z 2 < 0
Adopt Z 1 < 0&Y 2 > 0 Z 1 > 0&Z 2 > 0

(a) in the case when one firm adopts BDA strategy. The repeated
analysis and explain are also ignored.

4. Optimal decisions on BDA adoption

4.1. Profits maximization

In this section, we are going to analyze firm’s optimal decisions

about BDA adoption by employing a game-theoretical method.
Fig. 2. The Effect of BDA’s Privacy Risk on Social Welfare in Vertical Dominance. After analyzing all the cases including one firm adopts BDA, no firm
adopts BDA and both firms adopt BDA, we can obtain the firm’s
decision matrix. The main results about firm’s optimal BDA adop-
the results when one firm adopts BDA strategy as shown in Corol- tion decision are the same under horizontal and vertical domi-
lary 1. In addition, BDA’s efficiency differentiation (d1  d2 ) and pri- nance. Hence, we only present the results in the horizontal
vacy risk differentiation (a1  a2 ) between firms perform as the dominance case. Table 1 shows the decision matrix in horizontal
roles of BDA’s efficiency (d) and privacy risk (a) in the case when dominance.
one firm adopts BDA strategy. We do not repeat these analyses As shown in the decision matrix, each firm has two alternative
and explanations in this section. strategies toward BDA adoption: ‘‘Do Not Adopt” and ‘‘Adopt”. Each
firm has to choose a certain strategy in the competition. Four pos-
Lemma 4. In the vertical dominance, the equilibrium when both firms sible situations finally are formed as shown in Table 1. The situa-
adopt BDA is given as tion is stable (which is known as equilibrium) when both firms
ðd1  d2 Þv þ a1  a2  kð2d1 þ d2 Þ would gain more profit to choose the corresponding strategy.
p
1 ¼ c þ ; When one firm has chosen a particular strategy, the other firm will
3
ðd1  d2 Þv þ 2ða1  a2 Þ  kðd1 þ 2d2 Þ offer the strategy that can bring more profit. According to the deci-
p
2 ¼ c þ ; sion matrix above, firm i’s BDA adoption decision depends on the
3
value of Y i and Z i when the rival choose the strategy of ‘‘Do Not
ðv þ kÞðd1  d2 Þ þ a1  a2 Adopt” and ‘‘Adopt”, respectively. The decision functions are:
q
1 ¼ ;
3ða1  a2 Þ
A2i þ 6tAi A2 þ 6tAi  2Ai Ai
ðv þ kÞðd1  d2 Þ þ 2ða1  a2 Þ Yi ¼  mdi ; Z i ¼ i  mdi
q
2 ¼ ; 18t 18t
3ða1  a2 Þ
where Ai ¼ ðv þ kÞdi  a2i and i ¼ 1; 2For example, when firm 1 deci-
½ðv þ kÞðd1  d2 Þ þ a1  a2 
2
des to choose the strategy of ‘‘Do Not Adopt”, firm 2 will offer the
p
1 ¼  md1  F;
9ða1  a2 Þ strategy of ‘‘Do Not Adopt” if and only if Y 2 < 0. Otherwise, firm 2
½ðv þ kÞðd1  d2 Þ þ 2ða1  a2 Þ
2 would choose ‘‘Adopt” strategy if Y 2 > 0. Following the same rea-
q
2 ¼  md2  F; son, (Do Not Adopt, Do Not Adopt) is the final equilibrium when
9ða1  a2 Þ
Y 1 < 0 and Y 2 < 0. Similarity, we summarize the conditions for each
under the condition of 3t  ða1  a2 Þ 6 ðv þ kÞðd1  d2 Þ 6 case as shown in Table 2.
2ða1  a2 Þ  3t and a1  a2 P 2t. The closed-form solutions are too complex to solve. Therefore,
Lemma 4 shows that the higher BDA’s privacy risk (a1 ) between numerical simulation (see Appendix) is employed to obtain the
firms exhibits the same effects as the role of BDA’s privacy risk (a) results. The main results are summarized in Fig. 3.
in the case when one firm adopts BDA strategy. The lower BDA’s As shown in Fig. 3, the firm’s decision about BDA adoption is
privacy risk (a2 ) has the opposite effects on firms’ optimal prices, determined by BDA’s benefit (v þ k), BDA efficiency (d), and BDA’s
demands, and profits. In addition, BDA’s efficiency differentiation privacy risk (a). Since the closed-forms of these values are difficult
(d1  d2 ) and privacy risk differentiation (a1  a2 ) between firms to obtain, we analyze them through the numerical simulation (see
also have the same impacts as BDA’s efficiency (d) and privacy risk Appendix). Facing the different values of these factors, firms will

Table 1
The Decision Matrix in Horizontal Dominance.

Firm 2 Firm 1
Do Not Adopt Adopt
  !
Do Not Adopt p1 ¼ 2t  F p1 ¼ ½2ðv þkÞd72t
2
1 a1 þ6t
 md1  F
p2 ¼ 2t  F
p2 ¼ ½2ðv þkÞd72t1 þa1 þ6t  F
2

! !
Adopt p1 ¼ ½2ðv þkÞd72t2 þa2 þ6t  F p1 ¼ ½2ðv þkÞðd1 d272t
2 2
Þða1 a2 Þþ6t
 md1  F
p2 ¼ ½2ðv þkÞd72t ½2ðv þkÞðd1 d2 Þþa1 a2 þ6t
2 2
2 a2 þ6t
 md2  F p2 ¼ 72t  md2  F
 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41
Fig. 3. Firm’s Optimal BDA Adoption Decision.
choose different competition strategies toward BDA adoption. For
instance, when BDA’s benefit is small (v þ k 6 V  1 ), no firm in the
market would adopt BDA strategy. However, when BDA’s benefit
is medium (V 1 < v þ k 6 V 2 ), firms will also consider the values
of BDA efficiency and BDA’s privacy risk. Only when BDA efficiency
is large (d > 
d1 ) and BDA’s privacy risk is small (a 6 a  1 ), one firm
will adopt BDA strategy and the other will not. Otherwise, no firm
in the market would choose BDA strategy.
Proposition 1. In equilibrium, the firms would never choose to adopt
BDA strategy simultaneously in the duopoly competition.
According to the results as shown in Fig. 3, the situation of
(Adopt, Adopt) would never appear in the competition equilibrium.
In other words, the scenario when all firms adopt BDA strategy is
not an equilibrium result. Thus, firms cannot gain the most profits
if all of them adopt BDA technology. When one firm in the market
has invested on BDA technology, the other firm is better to do not
make the same investment so that the service differentiation can
be increased. On the contrary, if one firm decides only to offer tra-
ditional products and services without any investment on BDA, the
other firm can invest on BDA under some certain conditions.
Proposition 2. When making decisions about BDA adoption in
healthcare, firms may balance among BDA’s benefits (BDA’s benefit
for firms and consumers and BDA efficiency) and negative influence
(BDA’s privacy risk).
Proposition 2 shows the optimal strategies for firms to conduct
optimal decisions about BDA adoption. In this process, two aspects
of BDA technology should be noticed: BDA’s benefit and negative
influence. As shown in Fig. 3, when BDA’s total unit benefit
(v þ k) is small, firms should not invest on BDA technology except
for the situation when BDA efficiency is large and BDA’s privacy
risk is small. However, when BDA’s total unit benefit (v þ k) is
large, only one firm should invest on BDA technology. In such case,
the firm with higher ability on BDA initiative will always adopt
BDA technology. But the lower-ability firm is also likely to adopt
BDA when BDA’s total unit benefit (v þ k) and BDA efficiency is
extremely large and BDA’s privacy risk is small.
4.2. Social welfare analysis
In this section, we analyze the social welfare through the
numerical study. We compare the social welfare when no firm
adopts BDA and one firm adopts BDA under both horizontal and
33
vertical dominance differentiation8. The results are summarized in
Fig. 4. First, the social welfare when one firm adopts BDA (including
both horizontal and vertical differentiation) is always higher than
the case when no firm adopts BDA. From the previous analysis, we
find that firms never adopt BDA simultaneously on the market. In
other words, either one firm adopts BDA or no firm adopts BDA will
be the equilibrium on the duopoly competition. However, from the
social policy makers’ perspective, encouraging wearable device firms
to adopt BDA and promoting the differentiation in terms of BDA effi-
ciency could increase the social welfare.
In addition, the firms’ decisions on BDA adoption are homoge-
neous under the horizontal and vertical dominance differentiation.
These decisions are determined by the balance between the total
benefits of BDA (for consumers and firms) and privacy risks associ-
ated with BDA technology. However, in the analysis of social wel-
fare, horizontal and vertical dominance differentiation produce the
heterogeneous results. Specifically, horizontal dominance differen-
tiation leads to a higher social welfare than vertical dominance dif-
ferentiation if the total unit benefit is high (i.e., Scenario 3 as
shown in Fig. 4). On the contrary, the social welfare under vertical
dominance differentiation is higher than the case of horizontal
dominance differentiation when the unit benefit is low or medium
(i.e., Scenario 1 and 2 as shown in Fig. 4).
Furthermore, when the unit benefit is medium or high (Scenario
2 and 3), the social welfare will be maximized if the BDA efficiency
(d) is high and the privacy risk (a) is low. Surprisingly, when the
unit benefit is low (i.e., Scenario 1), a relatively lower level of
BDA efficiency (d) and a relatively higher level of BDA’s privacy risk
(a) will promote the higher social welfare.
5. A practical Analysis: Jawbone’s competition and BDA strategy
To verify the theoretical model, we provide a practical analysis
of Jawbone, which is the first vendor to push forward the idea of
the fitness wristbands. We analyze the press releases of Jawbone’s
key wearable devices and summarize them in Table 3. The data
indicate that various attributes ranging from fashion, functionality,
battery duration, and information quality to personalization are
highly considered in its product design. This result also demon-
strates that our assumption of the horizontal dimensions of pro-
8
We did not compare the social welfare under the case that both firms adopt BDA,
because the results will be derived from the case when one firm adopts BDA. As
discussed in Section 3.3, BDA’s efficiency differentiation (d1  d2 ) and privacy risk
differentiation (a1  a2 ) between firms perform as the roles of BDA’s efficiency (d) and
privacy risk (a) in the case when one firm adopts BDA strategy.
34 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41

Fig. 4. Comparison of Social Welfare under Different Scenarios. Note: m = 0.2, t = 0.1, F = 0.01, and c = 0.1 was used in all the scenarios; v + k was simulated as 0.3, 0.9, and 1.7
to represent the scenarios when the total unit benefit is low, medium, and high, respectively.

duct differentiation is indeed considered by the firms in reality.
The data in Table 3 indicate that Jawbone pays more and more
attention to real-time analytics and personalization in their pro-
duct update. Jawbone is trying to make full use of its large amount
of data collected from its current users as well as the indirect net-
work effects by opening its UP platform. Both large data capital and
UP platform will contribute to its BDA strategy. Actually, Jawbone
is changing its corporate strategy to a new direction, just as its CEO
said9:
‘‘We don’t consider ourselves . . . a hardware company anymore.
We have more software engineers, data scientists, everything. The
way we see hardware now is [that] it’s a way of showing the tech-
nology we invent. We are a ‘hug data company’, not only a big data
company.”
9
The quote is accessed from Recode’s interview with Jawbone’s CEO. The content
can be accessed at http://www.recode.net/2015/10/7/11619326/jawbone-isnt-a-
hardware-company-anymore-says-ceo-hosain-rahman.
One of its important focuses is applying advanced algorithms to
provide better fitness services, just as its head of data science and
analytics said10:
‘‘At Jawbone we have two principal use cases for machine learning,
the ‘analog to digital conversion’ from raw sensor data to health
measures like steps, and understanding relationships between
health metrics.”
Actually, from consumer side, we can observe the success of
Jawbone’s efforts on analytics. Here are some representative cus-
tomer reviews about Jawbone’s analytics functions from Amazon
store listed as below. We can see that BDA investment can improve
consumers’ perceived benefits. The market also exhibits the
emergence and necessary of BDA deployment.
Customer A: ‘‘This band is still going strong, and I still love the
constantly improving analytics.”
10
The quote is accessed at https://www.infoq.com/articles/Jawbone-Head-Data-
Science-Future-Wearables.
 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41
Table 3
Comparison of Jawbone’s Different Products.
Product Release Key Features and Issues in Official Release
Date Announcement
Jawbone April 16, j In partner with American Express, users can
UP4TM 2015 use a wearable fitness tracker with an embedded
NFC chip for Amex payment;
j American Express enhances the safety and
security in the payment process.
Jawbone April 15, j 45 percent smaller than its predecessor;
UP2TM 2015
jIt connects to users’ smartphones via Bluetooth
Smart to provide real-time progress reports;
j The connected UP app pairs users with Smart
Coach (i.e., an intelligent system that can learn
users’ habits and provide personalized
feedback and guidance).
Jawbone November j It is a multi-sensor platform that includes tri-
UP3TM 4, 2014
axis accelerometer, skin and ambient
temperature sensors, and sophisticated
bioimpedance sensors;
j In-depth information of different sleep stages
is tracked, and suggestions to improve sleep
quality will be provided;
j New advanced algorithms could
automatically identify workouts and classify
different activities;
j The connected UP app pairs users with Smart
Coach (i.e., an intelligent system that can learn
users’ habits and provide personalized
feedback and guidance);
j A slim, stylish, and low-profile design that can
be accessorized with jewelry or watches;
j Up to seven days of battery life, 10 meters of
water resistance, and a durable anodized
aluminum framework.
Jawbone UP November j Stylish new design;
MOVETM 4, 2014
j A durable anodized aluminum framework;
j The connected UP app pairs users with Smart
Coach (i.e., an intelligent system that can learn
users’ habits and provide personalized
feedback and guidance).
UPTM April 30, j 10 apps are integrated with UP platform;
Platform 2013
j It will open application programming
interface (API) for third-party developers soon;
j It aims to help users know themselves so that
to make smarter choices.
Jawbone UP November j A new wristband and app system that helps
13, 2012 users to track fitness information including
sleep, move, and eat;
j It provides users personalized insights to
make smarter choices;
Note: The information of these major products is retrieved from Jawbone’s official
press release, which can be accessed on https://jawbone.com/press.
Customer B: ‘‘There are many things to like about the UP3, first
among them the analytics applied by Jawbone to the data recorded
by the UP3 and the coaching advice derived from that analysis. I
liked the app with BodyMedia Fit, but the Jawbone UP app is far
more comprehensive and provides real insight into my fitness
and sleeping habits.”
Based on our theoretical model, the investment of BDA technol-
ogy improves Jawbone’s market performance. Indeed, the market
reports demonstrate that Jawbone takes 19 percent of market
share in wearable device market, which only fell behind the big-
gest one Fitbit’s 68 percent market share in year 201411. Jawbone’s
efforts on multi-dimensional product design and BDA strategy help
11
http://mobihealthnews.com/28825/fitbit-jawbone-nike-had-97-percent-of-fit-
ness-tracker-retail-sales-in-2013.
35
them to become the leader in wearable device market. However,
from year 2014 until now (i.e., first quarter of 2016), Jawbone even
cannot be counted as one of top 5 vendors in terms of market
share12. The most important reason is its product quality13. Most
consumers on Jawbone’s Amazon store complained about the quality
of Jawbone’s products. In addition, Jawbone’s recall of its first pro-
duct also indicates its product quality issue. Therefore, as considered
in our theoretical model, vertical differentiation (i.e., product qual-
ity) is also critical for firms in the fast-changing and hyper-
competitive product market.
In summary, the practical analysis of Jawbone demonstrates
that wearable device firms consider multiple dimensions of their
product design, including comfort, fashion, battery duration, and
functionality, etc. In addition, the quality of their products also
determines the likelihood of success in the competitive market.
Furthermore, by strategically assessing firms’ own financial status
and consumers’ preferences, they would better to make strategic
plans about the deployment of BDA in their product design. The
practical analysis not only verifies our theoretical model, but also
provides insights for the firms to compete in the wearable device
market.
6. Conclusion and discussions
In this paper, taking the example of healthcare wearable
devices, we investigate health IT provider’s optimal strategy
toward BDA adoption. Considering BDA’s efficiency and privacy
risk from consumer perspective and BDA’s benefit and cost from
firm perspective, we study the effects of BDA’s efficiency-privacy
and benefit-cost trade-offs on firm’s market competition and BDA
adoption. We adopt the two-dimensional product differentiation
framework to study this issue. We model the effects of BDA invest-
ment on consumer’s perceptions as both of perceived healthcare
efficiency improvement and privacy loss. BDA’s influences on firms
are modeled as both commercial benefit and implementation cost.
By comparing consumer’s preference on each differentiation
dimension, we have investigated both of horizontal dominance
and vertical dominance cases.
Our main results can be divided into three categories: the
effects of BDA on firms’ outcomes, the impacts of BDA on social
welfare, and firms’ optimal decisions about BDA adoption. How
firms should strategically adjust their prices according to the
dynamic of BDA’s efficiency and privacy risk and the consequences
of firms’ adjustment are identified in our results. Our analysis also
indicates how BDA technology influences social welfare in different
cases. Specially, BDA’s efficiency has positive influence on social
welfare when it is large. BDA’s privacy risk would increase social
welfare when it is large (small) in horizontal (vertical) dominance
differentiation. In addition, when making decisions about BDA
adoption in healthcare, firms should balance among BDA’s benefits
(BDA’s benefit for firms and consumers and BDA efficiency) and
negative influence (BDA’s privacy risk). Furthermore, it is not opti-
mal when all firms in the market adopt BDA strategy.
6.1. Theoretical implications
This study has several theoretical contributions to prior related
literature. First, we are among the first to apply economic theories
in big data field. This approach is quite different from the big data
literatures that focus on the concept definition of big data (Ghani
et al., 2014; Kshetri, 2014), the statement of big data critical
12
http://www.idc.com/getdoc.jsp?containerId=prUS41284516.
13
http://qz.com/565260/the-wearables-market-has-now-come-down-to-three-
players/.
36 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41

features and opportunities (Chen and Zhang, 2014), and literature large. However, the consumers locate far from the firm’s actual
reviews (Hashem et al., 2015; Shin and Choi, 2015). We study how location are likely to receive negative utilities in some cases, such
BDA’s efficiency-privacy paradox (consumer perspective) and as the price is too high. Thus, we can extend the model to study
benefit-cost tradeoff (provider perspective) affect commercial firms’ optimal competition strategies and outcomes under both
firm’s BDA adoption decision in healthcare sector. Both of BDA’s of fully covered and partially covered market in the next step. Sec-
efficiency and privacy risk from consumer perspective and BDA’s ond, due to the model complexity and the multi-dimensional attri-
benefit and cost from provider perspective are considered in our bute of the model, we cannot obtain the closed-form expression of
analytical model. This research has potentials to provide theoreti- firms’ optimal investment on BDA. Future studies can reduce the
cal foundations for future big data research. Second, different from number of dimensions or employing other simulation method to
prior two-dimensional product differentiation model references investigate the antecedents and consequences of firms’ optimal
(Telang et al., 2004; Wattal et al., 2009; Zhu and Zhou, 2012), we BDA investment.
not only measure the competition under both of horizontal and
vertical differentiation, but also consider the effects of emerging Acknowledgements
IT’s efficiency-privacy and benefit-cost tradeoffs on the competi-
tion. Third, this study also provides theoretical perspective on This research is supported by Major Program of National Natu-
understanding the dynamics of privacy concern and big data tech- ral Science Foundation of China (91218301), the Fundamental
nology in healthcare, which is quite different from prior literatures Research Funds for the Central Universities (JBK120505), National
from behavioral perspectives (Bansal et al., 2010; Li et al., 2014; Natural Science Foundation of China (71302186), and the Collabo-
Ramanathan et al., 2013). rative Innovation Center for the Innovation and Regulation of
Internet-based-Finance.
6.2. Practical implications
Appendix A. Proof of lemmas
This research also has several practical implications for both of
business managers and social planners. First, how firms should A1: Proof of Lemma 1
strategically adjust their prices with respond to BDA’s efficiency
and privacy risk in different cases is pointed. Facing a higher BDA When one firm (firm 1) adopts BDA strategy, the utility func-
efficiency, the firm without BDA strategy should decrease its price. tions are
However, the firm with BDA strategy should increase its price if the
u1 ¼ ð1 þ dÞv  ha  tx  p1 ; u2 ¼ v  tð1  xÞ  p2
investment of BDA technology brings more unit benefit for con-
sumers than firms a lot (v > 2k). Otherwise, it is better to decrease By letting u1 ¼ u2 , the indifference line is given as
its price when BDA efficiency is increased. When it refers to BDA’s
privacy risk, the firm without BDA strategy should charge more if p2  p1 þ dv þ t  ha
xðhÞ ¼
BDA generates a larger privacy risk. However, the firm with BDA 2t
strategy should set a lower (higher) price if BDA’s privacy risk is In horizontal dominance differentiation, the indifference line
increased in horizontal (vertical) dominance. intersects h ¼ 0 and h ¼ 1 at x1 and x2 , respectively.
Second, our results also provide some insightful suggestions for Mathematically,
firms on optimal BDA adoption. When firms are going to make
decisions about BDA adoption, two aspects of BDA technology p2  p1 þ dv þ t p2  p1 þ dv þ t  a
x1 ¼ ; x2 ¼ ;
should be noticed: BDA’s benefit and negative influence. When 2t 2t
BDA’s total unit benefit (v þ k) is small, firms should not invest Thus, the demand functions for firms are given as
on BDA technology except for the situation when BDA efficiency
is large and BDA’s privacy risk is small. However, when BDA’s total 1 p  p1 þ dv þ t  a=2
q1 ¼ ðx1 þ x2 Þ ¼ 2 ;
unit benefit (v þ k) is large, only one firm should invest on BDA 2 2t
technology. In such case, the firm with higher ability on BDA initia- 1 p  p2  dv þ t þ a=2
q2 ¼ ð1  x1 þ 1  x2 Þ ¼ 1
tive should always adopt BDA technology. In addition, firms are 2 2t
suggested to provide differentiated services in terms of BDA adop- According to the model, firms’ profit functions are given as
tion. The situation when all firms in the market invest on BDA is
not optimal.
p1 ¼ ðp1  c þ kdÞq1  md  F; p2 ¼ ðp2  cÞq2  F
Third, social planners are also guided by this study to conduct Then, firms decide their prices simultaneously. The first-order
better policies to increase social welfare. If consumers on the mar- conditions (FOCs) of profits on prices are given as
ket have more preferences on product fit (horizontal dominance
differentiation), social planners should make policies to promote @ p1 p2  2p1 þ dv þ t  a=2 þ c  kd
¼ ¼ 0;
firm’s higher level of BDA implementation. However, if consumers’ @p1 2t
preferences on BDA’s privacy risk dominate their product evalua- @ p2 p1  2p2  dv þ t þ a=2 þ c
¼ ¼0
tions, social planners should try to increase firms’ efforts on BDA @p2 2t
efficiency, meanwhile, they have to make policies to decrease
Hence, firms’ optimal prices are given as
BDA’s privacy risk (such as making more regulations on the privacy
protection of BDA technology). 2ðv  2kÞd  a 2ðv þ kÞd þ a
ph1 ¼ c þ t þ ; ph2 ¼ t þ c þ
6 6
6.3. Limitations and future research
Substituting firms’ optimal prices into their demand and profit
functions, we obtain
Although our stylized two-dimensional product differentiation
model captures the reality better, there are still some limitations 2ðv þ kÞd  a þ 6t 2ðv þ kÞd þ a þ 6t
in this work. First, we only investigate the fully covered market sit- qh1 ¼ ; qh2 ¼
12t 12t
uation by assuming consumer’s reservation utility is sufficient
 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41 37

½2ðv þ kÞd  a þ 6t

2
u1 ¼ ð1 þ d1 Þv  ha1  tx  p1 ; u2
ph1 ¼  md  F;
72t ¼ ð1 þ d2 Þv  ha2  tð1  xÞ  p2
½2ðv þ kÞd þ a þ 6t
2
ph2 ¼ F By letting u1 ¼ u2 , the indifference line is given as
72t
p2  p1 þ ðd1  d2 Þv þ t  2tx
Next, we solve the conditions to guarantee the case is horizontal hðxÞ ¼
dominance. In equilibrium, a1  a2
ðv þ kÞd þ a þ 3t ðv þ kÞd  2a þ 3t In horizontal dominance differentiation, the indifference line
x
1 ¼ ; x
2 ¼ intersects h ¼ 0 and h ¼ 1 at x1 and x2 , respectively.
6t 6t
Mathematically,
The equilibriums should satisfy 0 6 x
1 ; x
2 6 1 and qh1 ; qh2 > 0 p2  p1 þ ðd1  d2 Þv þ t p2  p1 þ dv þ t  a1 þ a2
  x1 ¼ ; x2 ¼
ph1  c þ kd > 0; ph2  c > 0 . 2t 2t
Therefore, the equilibrium condition is 2a  3t 6 ðv þ kÞd
Thus, the demand functions for firms are given as
6 3t  a and a 6 2t.
1 p  p1 þ ðd1  d2 Þv þ t  ða1  a2 Þ=2
q1 ¼ ðx1 þ x2 Þ ¼ 2
A2: Proof of Lemma 2 2 2t

When one firm adopts BDA strategy in vertical dominance dif- 1 p  p2  ðd1  d2 Þv þ t þ ða1  a2 Þ=2
q2 ¼ ð1  x1 þ 1  x2 Þ ¼ 1
ferentiation, the indifference line intersects x ¼ 0 and x ¼ 1 at h1 2 2t
and h2 , respectively. Mathematically, According to the model, firms’ profit functions are given as
p2  p1 þ dv þ t p2  p1 þ dv  t p1 ¼ ðp1  c þ kd1 Þq1  md1  F; p2 ¼ ðp2  c þ kd2 Þq2  md2  F
h1 ¼ ; h2 ¼
a a
Then, firms decide their prices simultaneously. The first-order
The demand functions are given as conditions (FOCs) of profits on prices are given as
1 p  p1 þ dv 1 @ p1 p2  2p1 þ ðd1  d2 Þv þ t  ða1  a2 Þ=2 þ c  kðd1  d2 Þ
q1 ¼ ðh1 þ h2 Þ ¼ 2 ; q2 ¼ ð1  h1 þ 1  h2 Þ ¼ ¼ 0;
2 a 2 @p1 2t
p1  p2  dv þ a
¼
a @ p2 p1  2p2  ðd1  d2 Þv þ t þ ða1  a2 Þ=2 þ c
According to the model, firms’ profit functions are given as ¼ ¼0
@p2 2t
p1 ¼ ðp1  c þ kdÞq1  md  F; p2 ¼ ðp2  cÞq2  F Hence, firms’ optimal prices are given as
Then, firms decide their prices simultaneously. The FOCs of 2ðd1  d2 Þv  ða1  a2 Þ  2kð2d1 þ d2 Þ
profits on prices are p
1 ¼ c þ t þ
6
@ p1 p2  2p1 þ dv þ c  kd @ p2 p1  2p2  dv þ a þ c 2ðd1  d2 Þv þ ða1  a2 Þ  2kðd1 þ 2d2 Þ
¼ ¼ 0; ¼ ¼0 p
2 ¼ c þ t þ
@p1 a @p2 a 6
Hence, firms’ optimal prices are given as Substituting firms’ optimal prices into their demand and profit
functions, we obtain
ðv  2kÞd þ a ðv þ kÞd þ 2a
pv1 ¼ c þ ; pv2 ¼ c þ 2ðv þ kÞðd1  d2 Þ  ða1  a2 Þ þ 6t
3 3 qh1 ¼ ;
12t
Substituting firms’ optimal prices into their demand and profit 2ðv þ kÞðd1  d2 Þ þ ða1  a2 Þ þ 6t
functions, we obtain qh2 ¼
12t
ðv þ kÞd þ a ðv þ kÞd þ 2a
qv1 ¼ ; qv2 ¼ ½2ðv þ kÞðd1  d2 Þ  ða1  a2 Þ þ 6t
2
3a 3a ph1 ¼  md1  F;
72t
½2ðv þ kÞðd1  d2 Þ þ ða1  a2 Þ þ 6t
2
½ðv þ kÞd þ a ½ðv þ kÞd þ 2a
2 2
ph2 ¼ F
pv1 ¼  md  F; pv2 ¼ F 72t
9a 9a
Next, we solve the conditions to guarantee the case is horizontal
Next, we solve the equilibrium conditions to guarantee the case
dominance. The equilibriums should satisfy 0 6 x
1 ; x
2 6 1 and
is vertical dominance. In equilibrium,
qh1 ; qh2 > 0. Therefore, the equilibrium condition is a1  a2 6 2t
ðv þ kÞd þ a þ 3t ðv þ kÞd þ a  3t and 2ða1  a2 Þ  3t 6 ðv þ kÞðd1  d2 Þ 6 3t  ða1  a2 Þ.
h
1 ¼ ; h
2 ¼
3a 3a
A4: Proof of Lemma 4
The equilibriums should satisfy 0 6 h
1 ; h
2 6 1 and qv1 ; qv2 > 0
 v 
p1  c þ kd > 0; pv2  c > 0 . When both firms adopt BDA strategy in vertical dominance dif-
Therefore, the equilibrium condition is 3t  a 6 ðv þ kÞd ferentiation, the indifference line intersects x ¼ 0 and x ¼ 1 at h1
6 2a  3t and a P 2t. and h2 , respectively. Mathematically,
p2  p1 þ ðd1  d2 Þv þ t p2  p1 þ ðd1  d2 Þv  t
A3: Proof of Lemma 3 h1 ¼ ; h2 ¼
ða1  a2 Þ ða1  a2 Þ

When both firms adopt BDA strategy, consumers’ utilities from The demand functions are given as
two firms are given as
38 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41

1 p  p1 þ ðd1  d2 Þv 1 @ ph1 2ðv þ kÞd  a þ 6t @ ph2 2ðv þ kÞd þ a þ 6t

q1 ¼ ðh1 þ h2 Þ ¼ 2 ; q2 ¼ ð1  h1 þ 1  h2 Þ ¼ < 0; ¼ > 0;
2 ða1  a2 Þ 2 @a 36t @a 36t
p1  p2  ðd1  d2 Þv þ a1  a2
¼ Hence, Corollary 1 is proved.
ða1  a2 Þ
B2: Proof of Corollary 2
According to the model, firms’ profit functions are given as
p1 ¼ ðp1  c þ kd1 Þq1  md1  F; p2 ¼ ðp2  c þ kd2 Þq2  md2  F In horizontal dominance, the effects of BDA efficiency (d) on
Then, firms decide their prices simultaneously. The FOCs of consumer surplus are
profits on prices are @CSh1 ðv þ kÞ½14ðv þ kÞd  7a þ 12ðv  cÞ þ 6t
¼ > 0 if
@ p1 p2  2p1 þ ðd1  d2 Þv þ c  kðd1  d2 Þ @d 72t
¼ ¼ 0; 7a  12ðv  cÞ  6t
@p1 ða1  a2 Þ d>
@ p2 p1  2p2  ðd1  d2 Þv þ a þ c 14ðv þ kÞ
¼ ¼0
@p2 ða1  a2 Þ
@CSh2 ðv þ kÞ½10ðv þ kÞd þ 13a þ 12ðv  cÞ  30t
Hence, firms’ optimal prices are given as ¼ > 0 if
@d 72t
ðd1  d2 Þv þ a1  a2  kð2d1 þ d2 Þ 30t  13a  12ðv  cÞ
p
1 ¼ c þ ; d>
3 14ðv þ kÞ
ðd1  d2 Þv þ 2ða1  a2 Þ  kðd1 þ 2d2 Þ
p
2 ¼ c þ In this case, the effects of BDA’s privacy risk (a) on consumer
3 surplus are given as
Substituting firms’ optimal prices into their demand and profit
@CSh1 7ðv þ kÞd þ 8a  6ðv  cÞ þ 7t
functions, we obtain ¼ > 0 if
@a 72t
ðv þ kÞðd1  d2 Þ þ a1  a2 7ðv þ kÞd þ 6ðv  cÞ  7t
q
1 ¼ ; a>
3a 8
ðv þ kÞðd1  d2 Þ þ 2ða1  a2 Þ
q
2 ¼
3a @CSh2 13ðv þ kÞd  8a þ 30ðv  cÞ  39t
¼ > 0 if
@a 72t
½ðv þ kÞðd1  d2 Þ þ a1  a2 
2
p
1 ¼  md1  F; 13ðv þ kÞd þ 30ðv  cÞ  39t
9a a<
8
½ðv þ kÞðd1  d2 Þ þ 2ða1  a2 Þ
2
q
2 ¼  md2  F Therefore, Corollary 2 is proved.
9a
Next, we solve the equilibrium conditions to guarantee the case B3: Proof of Corollary 3
is vertical dominance. The equilibriums should satisfy
0 6 h
1 ; h
2 6 1 and qv1 ; qv2 > 0. Therefore, the equilibrium condition In horizontal dominance, the social welfare is calculated as
is a1  a2 P 2t and 3t  ða1  a2 Þ 6 ðv þ kÞðd1  d2 Þ 6
W ¼ CSh1 þ CSh2 þ ph1 þ ph2
h
2ða1  a2 Þ  3t.
The effect of BDA efficiency on social welfare is given as
Appendix B. Proof of corollaries
@W h @CSh1 @CSh2 @ ph1 @ ph2
¼ þ þ þ
B1: Proof of Corollary 1 @d @d @d @d @d
ðv þ kÞ½20ðv þ kÞd  a þ 12ðv  c  tÞ
¼ m
In horizontal dominance, the effects of BDA efficiency (d) on 36t
firms’ outcomes are v ctÞ
Thus, @W h
@d
>0 if d > a12ð
20ðv þkÞ
þ 5ðv9tm
þkÞ2
@ph1 v  2k
¼ > 0 if v > 2k The effect of BDA privacy risk on social welfare is given as
@d 3
@W h @CSh1 @CSh2 @ ph1 @ ph2
¼ þ þ þ
@ph2 v þk @qh1 v þk @qh2 v þk @a @a @a @a @a
¼ < 0; ¼ > 0; ¼ < 0; ðv þ kÞd þ 2a þ 12ðv  cÞ  16t
@d 3 @d 6t @d 6t ¼
36t
@ p1 ðv þ kÞ½2ðv þ kÞd  a þ 6t
¼  m > 0 if > 0 if a > ðv þ kÞd  12ðv  cÞ þ 16t
h
Hence, @W
@d 18t @a

18tm  ð6t  aÞðv þ kÞ Therefore, Corollary 3 is proved.

d>
2ðv þ kÞ
2
B4: Proof of Corollary 4

@ p2 ðv þ kÞ½2ðv þ kÞd þ a þ 6t

¼ <0 In vertical dominance, the effects of BDA efficiency (d) on firms’
@d 18t outcomes are
In this case, the effects of BDA’s privacy risk (a) on firms’ out-
@pv1 v  2k
comes are given as ¼ > 0 if v > 2k
@d 3
@ph1 1 @ph2 1 @qh1 1 @qh2 1
¼  < 0; ¼ > 0; ¼ < 0; ¼ > 0; @pv2 v þk @qv v þ k @qv v þk
@a 6 @a 6 @a 12t @ a 12t ¼ < 0; 1 ¼ > 0; 2 ¼  < 0;
@d 3 @d 3a @d 3a
 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41 39

Fig. A1. The Results When v + k is Small. Note: v + k = 0.3; m = 0.3; t = 0.2 are used in simulation process.

Fig. A2. The Results When v + k is Middle. Note: v + k = 0.9; m = 0.2; t = 0.1 are used in simulation process.

@ pv1 @ p2 @ pv1 ½2  ðv þ kÞd  a½ðv þ kÞd þ a

@d
¼ 2ðv þkÞ½ð9vaþkÞdþa  m > 0 if d > 9am2 aðv þkÞ
2ðv þkÞ2
; ¼ > 0 if
@d @a 9a2
2ðv þ kÞ½ðv þ kÞd þ 2a v
@ p2
¼ <0 a < 2  ðv þ kÞd;
9a @a
In this case, the effects of BDA’s privacy risk (a) on firms’ out- ½4 þ ðv þ kÞd  a½ðv þ kÞd þ 2a
¼ > 0;
comes are given as 9a2

@pv1 1 @pv2 2 @qv1 ðv þ kÞd @qh2 ðv þ kÞd

¼ > 0; ¼ > 0; ¼ < 0; ¼ > 0; Therefore, Corollary 4 is proved.
@a 3 @a 3 @a 3a 2 @a 3a2
40 J. Wu et al. / Electronic Commerce Research and Applications 22 (2017) 24–41

Fig. A3. The Results When v + k is Large. Note: v + k = 1.5; m = 0.2; t = 0.1 are used in simulation process.

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