Professor Nicholas Economides Explains How Giving Data Away for Free is a Market Failure

In “Giving Away Our Data for Free is a Market Failure,” Professor Nicholas Economides, Stern School of Business of NYU, and Professor Ioannis Lianos, University College of London Faculty of Laws, explain how digital platforms have caused a market failure. They offer suggestions for how to address the imbalance between the dominant digital platforms and users who are put in a position to accept the default opt-in that gives away their data.

Below are a few excerpts from “Giving Away Our Data for Free is a Market Failure” by Professors Nicholas Economides and Ioannis Lianos.

The Value of Personal Information

Users vary widely on the value they place on privacy and in the value of their personal information to the platforms. Therefore, in a competitive market for personal information, some users would participate, and others would not. Transaction prices for the sale of personal information would also vary and likely be individually negotiated between the platform and the user.

In contrast, at present we observe a market failure where all transactions occur at the same zero price, and some transactions that would have occurred under competition do not occur. The market failure is a direct result of the imposition of the take-it-or-leave-it contract by dominant digital platforms and the default opt-in.

How a Digital Platform Benefits from this Market Failure

• First, it collects and appropriates data directly from the user and combines it with other data it buys from third parties, such as health or credit card transactions data, as well as public census income and race data, to create a profile that is highly desirable to an advertiser or a political campaign and can be sold at a high price.
• Second, data has network effects that improve the quality of the primary services of the platforms. Thus, the appropriation of more personal information enhances the dominance of Google and Facebook in their respective primary markets for internet search and social networking.
• Third, the platform does not pay for personal data except by a payment in kind with a service that has a negligible incremental cost. Thus, the platform always benefits from the appropriation of data in exchange for its service.

How the Market Failure Harms Users and Competition

• First, the market failure harms users who would be willing to pay for the primary service of the platform but are not willing to sell their personal information to the platform at zero price and therefore presently do not participate.
• Second, some of the users participating in the market at zero price would be compensated at a positive price under competition.
• Third, the market failure, through the acquisition of data, enhances the dominant position of digital platforms in their respective primary market.
• Fourth, the enhancement of the dominant position in the primary market allows platforms to make more users accept the requirement contract, thereby increasing the group of users who accept the requirement contract and the harm to them.

Remedies to Address the Market Failure

A required first remedy is to make “opt-out” the default regime in the collection of personal information, and sellers would opt-in if they so wish. The EU has adopted the opt-out regime in the GDPR based on an approach of “rights” rather than antitrust. But this is hardly enough because of the asymmetrical bargaining power between the user and a dominant digital platform that can act as a monopsonist utilizing significant user-specific information.

Another remedy could involve platforms ensuring that even after acquisition, policies at acquired companies that are more protective to privacy of personal data remain in place and are not replaced by the less privacy-oriented policies.

Platforms could switch to a regime of paying users for their data as we outlined earlier, which could lead to the emergence of a non-exclusive licensing market for user data when users opt-in to sharing their data with specific platforms. This would enable users to port their data to the platforms that offer them higher levels of return and better conditions in terms of valuing their privacy.

Data portability, providing users with the ability to export their social graph or their search history, constitutes another competition law remedy tackling the problem of the absence of a market for personal data. This ability ensures the free flow of personal data and ensures that users are not captive to a limited number of digital platforms.

Read the entire article: “Giving Away Our Data for Free is a Market Failure” by Professors Nicholas Economides and Ioannis Lianos (Promarket, February 1, 2021).

Professors Economides and Lianos discuss these issues in more detail in Restrictions on Privacy and Exploitation in the Digital Economy: A Market Failure Perspective, forthcoming in the Journal of Competition Law and Economics, and Antitrust and Restrictions on Privacy in the Digital Economy, Concurrences Review No. 2-2020, pp. 22-30, May 2020.