July 31, 2021
As I noted recently, commitment problems are the stuff of life. And according to some, that means the internet can't satisfy our preferences. We want more privacy, the argument goes. But unlike demands in "regular" markets, this one won't be satisfied.
Why? Profit-maximizing firms always have an incentive to collect more consumer information--regardless of consumer preferences. A "goody two-shoes" firm might refrain from collecting our info, but they'd only lose out to their less scrupulous rivals who make money from selling our data to advertisers. (Note: It's not really "our" data in the first place, but that's a discussion for another time). For some, markets might provide safety in the workplace or unadulterated food, but privacy on the internet is beyond reach.
Chris Hoofnagle, in The North Carolina Journal of Law and Technology, expresses this argument. For Hoofnagle, the attempt to provide privacy is a prisoner's dilemma that results in a "race to the bottom" vis-a-vis privacy. According to this perspective, firms that offer privacy-protective services are unicorns. They don't exist. Hoofnagle:
I think we will eventually come to a consensus that self-regulation will fail to protect privacy for the same reasons that it failed to ensure quality food and drugs. Self-regulation shields companies from accountability and encourages a race to the bottom. It gives little incentive to design products with privacy in mind.
Examine this highly deterministic view in vain for any sign of an entrepreneur who can devise solutions to this problem. In my opinion, positions like this stop the analysis short. Where is the endogenously emergent institutional solution--introduced by the very profit-seeking entrepreneurs maligned in this paper--which will solve this conundrum?
One way out is for firms to use hostages. Expensive signage and reputation make ideal hostages. Should a firm renege on its commitment to quality (i.e. privacy), it will never recoup the substantial investments it made in promising to maintain quality.
That's exactly what DuckDuckGo did starting in 2008. The company spent millions of dollars on expensive billboards, which they plastered all over Silicon Valley. DDG's privacy-protectiveness was literally it's sole differentiator relative to much larger search engines like Google. And the only way it can stay afloat is by keeping the promise to safeguard user privacy.
This seemingly simple solution demonstrates the power of institutional solutions to break out of prisoner's dilemmas, enabling parties to seize the gains from exchange that defection/opportunism would seemingly destroy.
Of course, the fact that DDG is tiny suggests consumers don't really value privacy all that much, but that too is a topic for another day.