INTERMEDIATE MICROECONOMICS INTERNAL ASSESSMENT

SESSION 2023-24

TOPIC:
Game Theory : Analyzing the Behavior of Companies that Collect and Use Personal
Data

NAME: Dakshi Kumar

ROLL NUMBER: 1287
SECTION: 1
 I. Introduction
A. Background information on data collection and privacy protection

Data collection and privacy protection have become increasingly important issues in recent
years, particularly with the rise of digital technologies and the growth of the internet.
Companies collect vast amounts of personal data from users every day, including sensitive
information such as financial and health data. This data is often used to train AI algorithms and
improve products and services, but it also raises significant privacy concerns.
B. Importance of the topic

The topic of data collection and privacy protection is important because it affects individuals,
companies, and society as a whole. Personal data can be used for a variety of purposes,
including marketing, research, and targeted advertising. However, the widespread collection of
personal data also poses significant risks, such as identity theft, cyber-attacks, and breaches of
privacy. Companies that collect and use personal data must balance the benefits of data
collection with the need to protect the privacy of their users.
C. Overview of the project objectives and methodology

The objective of this project is to use game theory to analyze the behavior of companies that
collect and use personal data. The project will focus on the incentives that companies have to
collect as much data as possible to improve their AI algorithms and gain a competitive
advantage. At the same time, companies also have to balance this with the risk of potential
legal or reputational damage if they fail to adequately protect the privacy of their users.
The methodology of the project will involve a literature review of existing research on data
collection and privacy protection, as well as the application of game theory concepts such as
Nash equilibrium, Pareto efficiency, maximin strategies, and mixed strategies. A game model
will be constructed to simulate the behavior of companies and their strategies in relation to
data collection and privacy protection. The outcomes of the game will be analyzed using the
above-mentioned game theory concepts to provide insights into the behavior of companies in
this context.

II. Literature Review

A. Overview of the existing literature on data collection and privacy protection

The literature on data collection and privacy protection is vast and covers a wide range of topics
related to the collection, use, and protection of personal data. Some of the key issues that have
been discussed in the literature include the legal and ethical implications of data collection, the
impact of data collection on user privacy, and the strategies that companies can use to protect
user privacy while still collecting valuable data.
Research has shown that companies often have a strong incentive to collect as much data as
possible to improve their AI algorithms and gain a competitive advantage. However, they also
face significant risks if they fail to adequately protect the privacy of their users. The literature
has explored a variety of strategies that companies can use to balance these competing
priorities, including data anonymization, data minimization, and enhanced security measures.

B. Identification of research gaps and questions to be addressed in the project

Despite the wealth of literature on data collection and privacy protection, there are still
significant gaps in our understanding of how companies behave in this context. One key
question that remains unanswered is how companies make decisions about the balance
between data collection and privacy protection. Additionally, there is a need for more research
on the impact of data collection on user trust and confidence, and how companies can build
and maintain trust with their users.

C. Critical analysis of the literature and its relevance to the project objectives

The existing literature on data collection and privacy protection provides a strong foundation
for this project, as it highlights the importance of balancing data collection with privacy
protection. The literature also provides insights into the strategies that companies can use to
achieve this balance, including data anonymization and enhanced security measures.
However, there are limitations to the existing literature, particularly in terms of its ability to
capture the complex decision-making processes that companies engage in when collecting and
using personal data. Game theory offers a useful framework for analyzing these decision-
making processes and understanding how companies balance competing priorities in this
context.

III. Methodology
Let's create a case of Pure Strategy to analyze the behavior of companies that collect and use
personal data.
Game: A data-collecting company and its customers
Players:
- The data-collecting company (C)
- Customers (A)

Assumptions:
- The data-collecting company collects personal data from its customers to improve its AI algorithms and
gain a competitive advantage.

- The customers are concerned about the privacy and security of their personal data.

Strategies:
- The data-collecting company can choose to collect as much data as possible (strategy X) or limit the
amount of data it collects (strategy Y).

- The customers can choose to continue using the services of the data-collecting company (strategy A) or
switch to a competitor that collects less data (strategy B).

Outcome matrix (Payoff matrix):

Consumer
A: continue to use the B: switch to the
Company

company competitor
X: collect as much data as possible -10, 10 -20, -5
Y: limit the amount of data collected 5,5 0,0

Explanation:
- If the data-collecting company collects as much data as possible (strategy X) and customers
continue to use the company (strategy A), the payoff for the company is -10 (because of
potential legal or reputational damage), and the payoff for the customer is 10 (because of the
benefits they receive from the services).
- If the data-collecting company collects as much data as possible (strategy X) and customers
switch to a competitor (strategy B), the payoff for the company is -20 (because it loses
customers and potential legal or reputational damage), and the payoff for the customer is -5
(because they may not get the same quality of service from the competitor).
- If the data-collecting company limits the amount of data collected (strategy Y) and customers
continue to use the company (strategy A), the payoff for the company is 5 (because it avoids
potential legal or reputational damage), and the payoff for the customer is 5 (because they still
receive some benefits from the services).
- If the data-collecting company limits the amount of data collected (strategy Y) and customers
switch to a competitor (strategy B), the payoff for the company is 0 (because it avoids potential
legal or reputational damage but loses customers), and the payoff for the customer is 0
(because they switch to a competitor that collects less data).

Extensive form:
- The extensive form of the game can be represented as a tree diagram, where each node
represents a decision point and each branch represents a possible action.

Continue
-10,10
COMPANY X

Switch Company
Consumer -20,-5

Continue
COMPANY Y 5,5

0,0
Switch Company

- In this game, there are two players: the data-collecting company and the customers. The
company can either collect as much data as possible (strategy X) or limit the amount of data
collected (strategy Y). The customers can either continue using the company (strategy A) or
switch to a competitor (strategy B).
- The payoffs for each player are shown in the following extensive form diagram:
- The first player to make a decision is the company, who chooses between strategy X and
strategy Y. If the company chooses strategy X, the second player (customers) chooses between
strategy A and strategy B. If the company chooses strategy Y, the customers also choose
between strategy A and strategy B.
- The payoffs for each player are shown in parentheses in the diagram, where the first number
represents the payoff for the company, and the second number represents the payoff for the
customers.
In summary, game theory can be used to analyze the behavior of companies that collect and
use personal data, and to identify potential strategies that can protect the privacy and security
of individuals while also allowing companies to innovate and compete in the market. By
considering different scenarios and potential outcomes, policymakers and stakeholders can
make informed decisions about how to regulate the use of AI and personal data, and how to
promote a more equitable and transparent digital economy.

Nash Equilibrium:

- (Y, A) is a Nash Equilibrium because neither player has an incentive to change their strategy
given the other player's strategy.
Player 1, represented by the decision maker C, has two options: either choose X or Y. If Player 1
chooses X, Player 2, represented by the decision maker A, has two options: either choose A or
B. If Player 1 chooses Y, Player 2 also has two options: either choose A or B.
If Player 1 chooses X and Player 2 chooses A, then the pay-off for both players will be (-10, 10).
If Player 1 chooses X and Player 2 chooses B, then the pay-off for both players will be (-20, -5).
If Player 1 chooses Y and Player 2 chooses A, then the pay-off for both players will be (5, 5). If
Player 1 chooses Y and Player 2 chooses B, then the pay-off for Player 1 will be 0 regardless of
Player 2's decision, and the pay-off for Player 2 will be 0 if they choose B, and -5 if they choose
A.
In the Nash Equilibrium strategy pair (Y, A), Player 1 chooses Y, and Player 2 chooses A. In this
scenario, if Player 1 deviates from their strategy and chooses X instead, their pay-off will
decrease from 5 to -10. Similarly, if Player 2 deviates from their strategy and chooses B instead
of A, their pay-off will decrease from 5 to 0.
Therefore, neither player has an incentive to change their strategy given the other player's
strategy, making (Y, A) a Nash Equilibrium.

Pareto Efficiency:
- (Y, A) is also Pareto Efficient because it is the only outcome where both players receive a
positive payoff.
Pareto Efficiency is a concept in game theory that refers to a state where it is impossible to
make one player better off without making another player worse off. In the given game, (Y, A) is
Pareto Efficient because it is the only outcome where both players receive a positive payoff.
In other words, if either player were to change their strategy, it would result in a lower payoff
for at least one player. For example, if player 1 were to choose X instead of Y, their payoff
would decrease from 0 to -5. Similarly, if player 2 were to choose B instead of A, their payoff
would decrease from 5 to 0. Therefore, (Y, A) is Pareto Efficient because it is the only outcome
where both players receive a positive payoff and no other outcome can improve the payoff of
both players simultaneously.

Maximin Strategy:
Maximin strategy is a decision rule used in game theory to determine the worst-case scenario
for a player and choose the strategy that maximizes the minimum payoff.
- The maximin strategy for the data-collecting company is to choose strategy Y, which ensures a
minimum payoff of 0 regardless of the customer's strategy.
- The maximin strategy for the customers is to choose strategy A, which ensures a minimum
payoff of 5 regardless of the company's strategy.

Consumer
A: continue to use the B: switch to the
Company

company competitor
X: collect as much data as possible -10 -20
Y: limit the amount of data collected 5 0

Mixed strategy:
- In the previous analysis, we assumed that players would choose a pure strategy (i.e., choose
one strategy and stick with it). However, in reality, players may choose a mixed strategy, which
involves randomly choosing between different strategies with certain probabilities.
- For example, the data-collecting company may choose to collect as much data as possible with
a certain probability (p) and limit the amount of data collected with a probability of (1-p).
Similarly, customers may choose to continue using the company with a certain probability (q)
and switch to a competitor with a probability of (1-q).
- The expected payoffs for each player can be calculated as follows:
- Payoff for the data-collecting company: -10p + 5(1-p) if customers continue to use the
company, and -20p + 0(1-p) if customers switch to a competitor.
 - Payoff for the customers: 10q - 5(1-q) if the company collects as much data as possible, and
5q + 0(1-q) if the company limits the amount of data collected.
- To find the Nash Equilibrium of the mixed strategy, we can use a method called "best
response analysis," where each player chooses the strategy that maximizes their expected
payoff given the other player's mixed strategy.
- Solving for the best response of the data-collecting company, we get:
- If customers continue to use the company (with a probability of q), the company's best
response is to collect as much data as possible (i.e., choose p=0).
- If customers switch to a competitor (with a probability of 1-q), the company's best response
is to limit the amount of data collected (i.e., choose p=1).
- Solving for the best response of the customers, we get:
- If the company collects as much data as possible (with a probability of p), the customers' best
response is to continue using the company (i.e., choose q=1).
- If the company limits the amount of data collected (with a probability of 1-p), the customers'
best response is to switch to a competitor (i.e., choose q=0).
- Therefore, the Nash Equilibrium of the mixed strategy is (p=0, q=1), where the company
collects as much data as possible, and customers continue to use the company.

Overall, the analysis shows that if companies choose to prioritize their own interests and collect
as much personal data as possible, it could lead to negative consequences for both the company
and its customers. On the other hand, limiting the amount of data collected could lead to a
more balanced outcome where both the company and its customers receive positive payoffs.

IV. Results and Discussion

A. Presentation of the results of the game analysis:
The analysis of the game shows that the Nash Equilibrium is (Y, A), which means that both
players will choose strategy Y and A respectively. This is the most stable outcome, as neither
player has any incentive to change their strategy given the other player's strategy. The (Y, A)
outcome is also Pareto Efficient, as it is the only outcome where both players receive a positive
payoff. The maximin strategy for player 1 is to choose X, as it guarantees a minimum payoff of -
10, while the maximin strategy for player 2 is to choose A, as it guarantees a minimum payoff of
0.

B. Discussion of the implications of the results for companies that collect and use personal
data:
The results of the game analysis have important implications for companies that collect and use
personal data. The analysis shows that companies have a strong incentive to collect as much
data as possible, as this will allow them to improve their AI algorithms and gain a competitive
advantage. However, this must be balanced with the risk of potential legal or reputational
damage if they fail to adequately protect the privacy of their users.

The results of the game analysis suggest that companies that collect and use personal data
should prioritize privacy protection as a key part of their business strategy. They should
implement robust data protection policies and procedures, such as data encryption and
anonymization, to minimize the risk of data breaches and protect the privacy of their users.
Failure to do so could result in reputational damage, loss of customer trust, and potential legal
action.

C. Discussion of the potential solutions to address the challenges posed by data collection and
privacy protection:
To address the challenges posed by data collection and privacy protection, companies can
implement a number of potential solutions. One solution is to implement a "privacy by design"
approach, which involves building privacy considerations into the design of products and
services from the outset. This can help to minimize the risk of data breaches and protect the
privacy of users.
Another potential solution is to implement strong data protection policies and procedures, such
as data encryption and anonymization, to minimize the risk of data breaches and protect the
privacy of users. Companies can also work with regulators and industry bodies to develop best
practice guidelines and standards for data protection and privacy, and ensure compliance with
relevant laws and regulations.
In addition, companies can engage with their customers and stakeholders to build trust and
transparency around data collection and use. This can involve communicating clearly and
transparently about how data is collected, used, and protected, and providing users with
greater control over their personal data.
 The results of the game analysis suggest that companies that collect and use personal data
need to balance the benefits of data collection and use with the risks of potential legal or
reputational damage if they fail to adequately protect the privacy of their users. By
implementing robust data protection policies and procedures, engaging with stakeholders, and
prioritizing privacy protection as a key part of their business