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Privacy and data collection issues have dominated recent headlines, with Facebook and CEO Mark Zuckerberg being taken to task for permitting the use of consumer data by third parties — apparently as a function of Facebook’s own rather liberal data collection policies. Also in the news is the impending implementation of the European Union’s General Data Protection Regulation (GDPR), which aims to increase privacy protections for consumers (for example, consumers will be asked to “opt-in” for cookies) and imposes higher compliance costs for tech and other data-gathering firms. The echoes of that legislation are already being heard in the United States, as notices are being sent to consumers by any US company that believes it may have citizens of the EU as part of its clientele.
Zuckerberg’s congressional testimony has led to much hand wringing as to what the response (if any) should be to the seemingly competing goals of innovation in the internet space (that is fueled by the selling of consumer data) and privacy protections. One of the solutions offered is EU-style legislation. Zuckerberg himself seemed to invite regulation of his industry in his admission of the policy mistakes his company has made. But such consumer protection regulation should be handled gingerly. Economic evidence from past regulatory regimes has shown that regulation favors incumbents and stifles innovative, new firms from competing. In that respect, Zuckerberg’s invitation of regulation is less self-flagellation than it is a competitive strategy.
As a general rule, the concern with passing regulation that strengthens and protects incumbents is that it may lessen competition. This may in turn lead to higher consumer prices and less innovation such that the intended regulatory benefits are swamped by the unintended consequences. There are a few reasons why regulation may help the incumbent. One reason is fairly straightforward — regulators demand to see compliance, and compliance is expensive. Incumbents are larger and can usually absorb these costs more effectively than small firms. Another reason is that regulation usually stops the market at the status quo — thereby favoring the existing titans of the market. For example, a ban on advertising of children’s cereal means that the incumbent who already has brand recognition will (1) get to lower its marketing costs and (2) not face vigorous competition from would-be entrants.
Turning focus a bit from the direct regulatory costs that may decrease competition against incumbents to selecting among different regulatory choices, it is useful to determine if some choices may be more or less helpful to the incumbent. For example, there has been much discussion in the US about whether an “opt-out” (which we have now) or “opt-in” (which the EU is imposing for cookies) system for privacy is preferable. A good question to ask is which policy may stifle entry, strengthen incumbents, or otherwise harm competition.
On the one hand, a change from an opt-out to an opt-in system (for example) may help incumbents because, such as in the children’s cereal example, incumbents already have high levels of data and the change would just hurt the newcomer who has comparatively little data. On the other hand, to the extent data-use limitations are part of the privacy regime (even though you have data, you can’t use them without additional consent), we might expect that to benefit small firms — it might level the playing field.
In an interesting economic model by Campbell, Goldfarb, and Tucker, incumbents are determined most likely to win with an opt-in regime.
In a world with no transaction costs, one might expect privacy regulation to favor small firms over large ones: if data generates economies of scale, then reduced access to data might help to overcome such effects. However, this ignores that most privacy regulation requires firms to obtain one-time individual consumer consent to use consumer data (rather than the consent requests increasing with the amount of data used). Therefore, privacy regulation imposes transaction costs whose effects, our model suggests, will fall disproportionately on smaller firms. Consequently, rather than increasing competition, the nature of transaction costs implied by privacy regulation suggests that privacy regulation may be anti-competitive.
In the world of privacy protection there are of course many concerns to be weighed beyond the concentration of economic power — the meaning of contractual “consent” and rights of self-determination perhaps first among them. Moreover, understanding the costs associated with privacy protection legislation, regulation, or policy is not to say it should not be pursued — I have argued that it should. It is to say that the economics of any adopted strategy should be part of the consumer protection calculus so that consumers, not Zuckerberg, are the greatest beneficiaries.
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