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13-02-2019

Is the market for digital privacy a failure?

Author: Caleb S. Fuller

Published in: Public Choice | Issue 3-4/2019

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Abstract

Conventional wisdom holds that the market for digital privacy fails owing to widespread informational asymmetry between digital firms and their customers, behavioral biases exhibited by those customers, and negative externalities from data resale. This paper supplies both theoretical and empirical reasons to question the standard market failure conclusion. On the theoretical side, I argue that digital markets are not qualitatively different from markets for other consumer goods. To wit, just as in traditional markets, it is costly to measure product attributes (such as “privacy”) and, just as in more traditional settings, some firms offer credible commitments to reduce the threat of potential opportunism. On the empirical side, I conduct a survey of Google’s users. The most important results of this survey suggest that, at least with respect to Google, (a) the extent of informational asymmetry is minimal and (b) the demands for “unconstrained” and “constrained” privacy diverge substantially. Significantly, 86% of respondents express no willingness to pay for additional privacy when interacting with Google. Among the remaining 14%, the average expressed willingness to pay is low.

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See here for more information on Google’s decision to drop the phrase: https://gizmodo.com/google-removes-nearly-all-mentions-of-dont-be-evil-from-1826153393.

Less consensus exists regarding what specific policy interventions should be implemented. Some scholars favor outright bans on information collection, others call for a legally mandated opt-in, and still others argue that greater transparency be required of firms. The EU, Japan, Canada, Singapore and South Africa all have passed comprehensive digital privacy legislation. For an analysis of intervention, see Fuller (2018).

Haven Insights used Lucid’s platform for academic research. See more details here: https://luc.id/lucid-for-academics/.

It has been characteristic to describe privacy itself as an “economic good” (Farrell 2012; Acquisti et al. 2016, p. 446). This paper conceives of privacy, not as an economic good itself, but as an attribute of some other economic good.

Of course, to get a library card, one usually provides name, physical address, email address, etc.…The information collected by digital firms tends to be a browser’s location, browsing history, and (often) purchase history. If one wishes to avoid surrendering information to a library, it is possible to use the library without checking out any items.

Expecting “perfect information” to describe the real world commits the “Nirvana Fallacy” (Demsetz 1969). Unsurprisingly, an orange grower will tend to be more informed about an orange’s attributes than prospective fruit buyers (Barzel 1982).

The company earns revenue by displaying ads based merely on what search terms a browser enters but does not track the user.

Although DuckDuckGo has grown steadily, it averaged only a little more than 20 million queries daily as of early 2018, far less than 1% of Google’s daily traffic. See https://duckduckgo.com/traffic.html for statistics on DuckDuckGo’s traffic over time. See http://www.internetlivestats.com/google-search-statistics/ for a daily count of Google searches.

Respondents who indicated unawareness of Google’s information-collection practices were not asked questions four, five, or six.

Google may collect any of the data listed in question four of the survey’s text (Appendix A) except: “Your driver’s license”, “Your social security number”, “Your medical information” and “Your credit card information.”

The results show that individuals are least aware of the fact that Google gathers information about their devices. Still, 51% of “aware respondents” know that device information is collected. Arguably, for most users, device information is the least “sensitive” or “important” piece of information that Google collects. It also is possible that some consumers are unfamiliar with the term “device information.”

Google may use collected information to “target ads based on your search history and location”, to “aggregate large quantities of anonymized data”, and to “store your data indefinitely”, but its privacy policy does not permit any of the other uses listed in question five of the survey (see the survey’s text in Appendix A).

As noted by Acquisti et al. (2016), information asymmetry provides another explanation, but I am ruling that out for a moment so as to isolate the purported effect of behaviorial biases.

“[S]tudies in which consumers are… asked to consider paying… to protect their privacy are… scarcer” (Acquisti et al. 2013, p. 254).

Goldfarb and Tucker 2011 examine the economic impact of the EU’s switch to an opt-in rather than an opt-out default option. They find that the switch reduced the effectiveness of the average digital ad dramatically because of the inability to target advertisements.

Unconstrained surveys also are common in other contexts. For example, see Clark and Powell’s (2013) analysis of “non-economic” or “unconstrained” survey approaches in the literature on sweatshops.

Acquisti et al. (2016, pp. 44–445) affirm that both costs and benefits are associated with disclosure of personal information.

Non-money differentials may include preferences for beauty, love, discrimination and so on (Boettke and Candela 2017), but those differentials come in the form of personal information in the case of digital privacy.

Note that 149 respondents indicated a willingness to pay for privacy on Google, but when they subsequently were prompted to state the amount they would be willing to pay, they entered $0. Those 149 respondents were re-categorized as being unwilling to pay for privacy and thus included amongst the 86% of all respondents not willing to pay for privacy.

The survey began with a sample of 6864 respondents, but 781 were eliminated because they did not use Google. It is unclear how those non-users would respond to the remainder of the survey. At one extreme, it is possible that 100% of them refrain from using Google because of privacy concerns and all of them would also be willing to pay for privacy on Google. If that were the case, 23% of the Internet-using population would be willing to pay for privacy on Google. At the other extreme, 100% of them could also be unwilling to pay for privacy on Google because they never use Google (for reasons other than privacy concerns). If that were the case, only 12% of the Internet-using population would be willing to pay for privacy. The truth probably lies somewhere between the extremes.

It is impossible to determine whether respondents are perfectly consistent between their annual and “per-search” valuations. For example, someone selecting “$1 to $5” may have had $1 in mind, whereas another had $5 in mind. Nonetheless, the answers are “generally consistent” in that both the annual and “per-search” prompts elicit relatively low WTPs.

Respondents who believe that Google does not collect information were excluded from the question about whether Google can change its privacy policy unilaterally. Thus, the relevant sample comprises users who are aware of Google’s information-collection practices and who express a desire for Google not to collect their data.

The respondents are comprised of those users who were aware that Google engages in information collection (question three) and expressed a willingness to pay for privacy (question nine).

Of course, other ways of categorizing respondents as “relatively informed” or “relatively uninformed” with respect to question five are possible. My strategy for categorization was selected in the interest of generating a sufficiently large sample size for both “informed” and “uninformed” groups, given that most respondents are unwilling to pay. Respondents who selected only two correct answers, but no incorrect answers are categorized as “uninformed” because they seemingly exhibit less awareness of overall data collection practices than those who selected all three correct answers and exhibited some degree of misinformation by also selecting an incorrect response.

The respondents are comprised of those who prefer not to have their information collected (including those both willing and unwilling to pay for privacy).

Acquisti et al. (2016) also list “quantity discrimination in insurance and credit markets”, but I did not present respondents with that option because it was the most technical of the possibilities suggested by those authors.

In addition to the four possibilities listed by Acquisti et al. (2016), my survey added: “Advertisers being able to target you directly”, “A government agency forcing an internet entity that has collected your information to hand over the information”, and “Other (please specify)”.

Section 3.2.2’s results provide evidence for doubting this argument.

Questions four, five and ten randomized the response options to respondents. The other questions presented the response options in the order displayed in Appendix A

Question 13 contains a wording error. The question should not have included the phrase: “Enter a whole number in US dollars” because respondents were not offered an open-ended response option.

Appendix B contains the results from all survey questions except for question one (a screener question to determine whether respondents are Google users) and question 12 which asks about how much consumers would be willing to pay for privacy. The paper’s text reports the results of question 12.

As described in the paper’s text, some respondents indicated a positive WTP, but then subsequently entered a value of “zero” for question 12. Those respondents (totaling 149) were re-categorized in both the text and in Appendix B’s table as being unwilling to pay.

The paper’s text describes how respondents were assigned to either the “informed” or “uninformed” categories. Respondents who prefer their information to be collected are excluded from this analysis.

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Title: Is the market for digital privacy a failure?
Author: Caleb S. Fuller
Publication date: 13-02-2019
Publisher: Springer US
Published in: Public Choice / Issue 3-4/2019
Print ISSN: 0048-5829
Electronic ISSN: 1573-7101
DOI: https://doi.org/10.1007/s11127-019-00642-2

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