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The Hidden Anti-Competitive Side Effects of Privacy Regulation

· June 1, 2012

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Business researchers Catherine Tucker and Avi Goldfarb floated an interesting question recently, asking whether privacy regulation could form an anti-competitive barrier that benefits established entities over new and developing companies. In a paper from December of last year and an accompanying blog post from April, the authors point out that proposed privacy regulations could easily have unintended consequences that would lead to anti-competative results. New privacy rules should be generally eschewed for this reason, and any proposed privacy regulation needs to carefully examine this potential and be carefully crafted to minimize the harm.

The paper is an in depth analysis of the competition between established and new firms in the face of privacy regulation, and is worth reading through. In short, however, they find that established firms are less likely to be adversely affected by new privacy regulation than are new firms for a couple of reasons. This anti-competitive side effect is clearly not intended by the authors of regulations, but the researchers find they are likely to occur anyway.

The major anti-competitive effect modeled in the study is that of a generalist firm competing with a niche market firm that is smaller and newer. Drastic opt-in privacy regulation such as the proposals we’re seeing in the EU introduce extra costs in obtaining consent. Without regulation of that kind, the researchers found that both firms’ offerings were used. With the regulation, however, the smaller firm, facing those costs, will choose not to enter the market, leaving only the larger generalist firm.

In their blog post, the authors also outline a second possible anti-competitive result. Presume two firms in the same market, one established and one just getting started, when new privacy regulation is introduced. Even if the new entrant into the market is providing a better user experience, the process of obtaining opt-in consent for data collection represents a switching cost, and customers are more likely to stick with the less effective company they know than switch to a competitor.

The idea that privacy regulation may have competitive implications is a relatively new one, but it is important that we explore it. Protecting privacy is important, but we all have to find ways to do that without compromising innovation and competition in the marketplace. Research like that performed by Tucker and Goldfarb will be vital to pointing out where those boundary lines are.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

Privacy

Trust in the integrity and security of the Internet and associated products and services is essential to its success as a platform for digital communication and commerce. For this reason we’re committed to upholding and advocating for policymaking that empowers consumers to make informed choices in the marketplace while not impeding new business models.