Author(s): Chris Jay Hoofnagle
Year: 2013
Abstract:
Offers
of “free” services abound on the internet. These offers cause a
conundrum for consumer protection. Courts are apt to discount users’
claims against such services; one recently held that users are not
“consumers” for purposes of California consumer protection law. Industry
leaders push to monitor users ubiquitously, an imperative driven by the
desire to fund “free” content. Policymakers struggle with this
imperative and weigh it against vague consumer preferences for privacy,
which users seem to happily abrogate to get the next new free service.
These problems, we argue, flow from attention to the price of free
offers instead of their costs.
To elucidate these costs, we
apply a transaction cost economic (TCE) approach to “free” transactions
with personal information. TCE provides a framework for analyzing these
exchanges even where the price of the product seems to be zero.
“Freemium” offers employ a form of cross-subsidy, a technique widely
accepted in infrastructure industries, and a basic tool used to support
the equitable delivery of products and services with the understanding
that some have more willingness and ability to pay than others. However,
we argue that information intensive companies misuse “free” to promote
products and services that are packed with non-pecuniary costs.
Current
governance structures allow firms to collect valuable information ex
ante and monetize it ex post, despite consumer preferences for privacy
and the impression, given to the consumer, that the transaction would be
“free.” Some firms obligate consumers to divulge personal information
in order to try a “free” sample of their online product. Other firms,
such as social networking services, would not have a product if not for
the personal information consumers create and upload. In both business
models, what may begin as ex ante misalignment between the interests of
the firm and consumer can become ex post maladaptation when the firm
realizes the financial gains possible from monetizing the consumer’s
personal information. Targeted advertising, switching costs, the cost to
consumers to try to monitor the actions of the firm, viral patterns of
distribution of consumers personal information amongst firms, and
disincentives that lead firms to underinvest in information security,
are among the contractual hazards that raise transaction costs for
consumers.
We then turn to potential governance structures to
curb the incentives of firms to raise transaction costs for consumers.
One source for legal intervention is the Federal Trade Commission’s
“Free Guidelines.” These guidelines will be reviewed in 2017, offering
an opportunity to reconsider the fairness of free offers conditioned on
provision of personal information. As currently written, they do not
directly address exchanges for personal information. Still, two remedies
flow from the FTC Guide: clearer disclosures that personal information
forms the basis of the transaction, and the requirement to establish a
regular price before marketing a service as free.
While
behavioral economics may support an outright ban of free offers because
of their biasing effects, TCE suggests other strategies for reform,
focused upon placing business risk more firmly in the hands of
businesses. These interventions go beyond the traditional transparency
and accuracy requirements suggested by privacy law. They involve
eliminating the avoidable costs that arise for consumers when compelled
to provide personal information in order to try a “free” product,
recognizing the role consumers play in the production and business of
social networking services, and requiring each third party interested in
access to a consumer’s personal information to obtain opt-in per
consumer through full disclosure with
Keywords: transaction cost economics, TCE, free, free offers, privacy, social network services, right to delete, portability, right to be forgotten, Williamson, New Institutional Economics, Federal Trade Commission, FTC free guide, Chris Anderson
Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2235962