The median Internet user is concerned about digital advertisers collecting personal information. To address these fears, the European Union passed the Privacy Directive to regulate the common business practice of information collection. This paper investigates the potential effects of this regulation, finding that the law is likely to generate several unintended consequences. Economists and legal scholars acknowledge that personal data serves as the “price” for accessing many digital platforms. I extend this logic to argue that if a regulation enables consumers to stop supplying this information, while continuing to consume the site’s content, it is equivalent to a price control. Next, I discuss unintended consequences that this price control may generate: tie-in sales, investment flight, and altered exchange characteristics. Lastly, I conclude that, just as with traditional price controls, the privacy price control may be a way for government officials to enhance their popularity with the citizenry. In short, my analysis suggests that one of the most well-researched policy interests of economics—the theory of price controls—can shed light on one of economists’ newest interests: digital privacy.
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Note that firms themselves may collect information as in the case of Google saving all searches. Alternatively, firms may simply serve as the platform that enables advertisers to collect information.
There are many different conceptions of privacy, however, even within economics. For example, Hirshleifer (1980) critiques the Posner-Stigler conception. As Tucker (2016) states: “Economics has struggled to arrive at a unified theory of privacy.” Solove, a legal scholar, concurs: “Privacy is a concept in disarray,” 2006. Thomson (1975) observes: “Perhaps the most striking thing about the right to privacy is that nobody seems to have a very clear idea what it is.”
It seems just as plausible, on the grounds of behavioral economics, that consumers might over-value their privacy. After all, a standard result in the behavioral economics literature is that individuals may over-estimate the probability of rare events, such as a privacy breach.
Stigler and Posner examine broader privacy regulation, rather than digital privacy regulation specifically, but their analysis is applicable to the digital environment.
The topic of “data breaches” might be better categorized as a “cybersecurity” issue.
Farrell concludes that privacy is best analyzed as a final good rather than an intermediate good sought for the end of achieving some other good.
Other companies, like Facebook, voluntarily implement an opt-in default in which service is conditional on surrendering certain personal information. Given that these firms have already implemented opt-in, we would expect them to be relatively less adversely impacted by a mandated opt-in.
See Cheung (1974) for a survey of the literature on price controls.
Consumers may indeed be unaware of all the uses to which a firm collecting their data will put it. Given that they continue to visit such sites, however, the costs of discovering this information must outweigh the benefits they receive from visiting the website. The presence of information asymmetry does not change the fact that this is an exchange between firms and consumers. Consumers can refrain from the exchange if they are made uncomfortable by the lack of information, just as someone could refrain from purchasing a used car for the same reason.
Of course, beyond a point, additional users increase the probability of a website crashing.
There is no overarching, federal digital privacy law in the US. However, Japan, China, South Africa, and Singapore have joined the EU in regulating digital privacy at the national level.
Even in the case where “consent” is interpreted to mean that the the visitor’s default browser settings accept cookies, the logic of price control is still applicable. After all, a browser may change her browser’s default settings, especially if prompted by a pop-up privacy notice. Most consumers will not change their default settings, but the law does alter the total number of consumers paying the full price.
“Effectiveness” was measured as the “stated intention to buy” the product that had been advertised.
Though rent control exists all over the world, there is large variance in enforcement between locales (Arnott 1995, p. 100).
Any empirical investigation of a shift to fee-based services must be careful to distinguish market-driven adoption of such business models from adoption following as a direct consequence of regulation.
Intuition suggests that laws curtailing the use of targeted advertising will cause revenue to Internet platforms to fall because digital advertisers are willing to pay less for non-optimized ad space. Hummel and McAfee (2015) show theoretically, however, that targeted ads can, under very specific conditions, reduce the revenue to the platform firm. Such a result follows from the combination of highly-optimized targeting and a few dominant bidders for ad space.
One possible complication is the “EU-US Privacy Shield,” which replaces the “International Safe Harbor Privacy Principles.” The “Shield” governs the transfer of EU-citizen data from the EU to the US. The “Shield” is legally contested and applies to “personally identifiable information” (PII). As Goldfarb and Tucker (2011) note, it is not clear whether “clickstream data” should be categorized as PII or not. Nonetheless, as Goldfarb and Tucker (2011) find, there is a difference between US websites and EU websites regarding the quality of information they are able to collect from an EU browser. This suggests that, at least in practice, there is a significant difference between the way the EU rules apply to US and EU firms.
Here I am concerned with counterintuitive results, and not simply with those that we might most easily predict. For example, one might easily imagine that regulation causes consumers to be faced with the same number of ads, only that these ads are less targeted. Even whether this is a welfare gain is itself questionable because it raises the search cost of a consumer finding a product (Varian 1996).
This is also contrary to Weyl (2009) who predicts that a price control imposed on one side of a two-sided market will result in a price increase on the other side of the market. Here, the prices that advertisers’ willingness to pay likely falls. Of course, this logic does not run counter to Weyl; it simply demonstrates another peculiarity of the price control when information, rather than money, is the medium of exchange.
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I wish to thank Chris Coyne, Peter Leeson, Paola Suarez, David Lucas, Nicholas Pusateri, and two anonymous referees for their helpful comments on this paper. Any remaining errors are my own.
I wish to thank the Mercatus Center for their summer 2016 financial support which enabled me to begin this project.
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Fuller, C.S. Privacy law as price control. Eur J Law Econ 45, 225–250 (2018). https://doi.org/10.1007/s10657-017-9563-6
- Digital privacy
- Price control
- EU privacy directive