4. Transaction costs
Web services minimize transaction costs by preventing their customers from knowing what personal information they collect, how they use the information, and who they share it with.
"The merchants, who possess the right to use the information, have no incentive, initially, to draft their contracts to inhibit disclosure. Thus, the possibility of inefficient outcomes arises, with a consumer who values privacy more than the merchant values the information unable to acquire the rights to the information.... Consumers generally know neither the use to which information is put nor its value; technology has outpaced awareness of technology. Merchants, on the other hand, always know the value, because they are selling the information. It is therefore in the interest of merchants to obtain the information surreptitiously, and contract without reference to it. A privacy rule, however, forces the merchant to bring his unique knowledge out into the open. The consumer becomes better informed and therefore the transaction is more likely to achieve the most efficient allocation."[1]
Existing network architectures work against disclosure to individuals and in favor of data collectors' preference not to share the details of their operations with their customers.
"Ease of transfer, difficulty of monitoring transfer, and persistence of digital data allow [social networking services] to present formidable barriers to anyone attempting to control the flow of value from the personal information that they provide to [social networking services]. Information-intensive companies exacerbate these problems by relying upon consumer ignorance of the rules, masking practices, and shifting practices once they have collected personal information from consumers. Under current structures of governance, there is no exit for consumers who wish to leave [a social networking service]."[2]
The best way to equalize the personal-information transaction costs and benefits is to provide individuals with full disclosure about the collection and use of their personal information, and to give them the ability to lock the personal data that has been collected.
"[A] consumer right to rescind enrollment in [a social networking service], triggering a deletion of information shared with the service, and an ability to export information shared with the service are appropriate given the skewed aspects of personal information transactions."[3]
The longer the relationship persists between individuals and data collectors, the greater the value of the personal information collected and the greater the risk to individuals of loss or misuse of their personal data. This argues in favor of an ongoing contractual relationship that is terminable by either party on demand.
"Signing up for [a social networking service] takes just seconds. However, the relationship can last for a great deal of time and, as such, it resembles other kinds of transactions seen in more visible sectors of networked infrastructures (e.g., finance, water, and communications) — sectors where we have experience and research that leads us to be much more concerned about what happens as time goes on. Similarly, transaction cost economics focuses on the fact that the cost of transacting can rise, uneconomically, after the contract is signed.... Ex post costs of contracting take several forms. These include (1) the maladaptation costs incurred when transactions drift out of alignment… (2) the haggling costs incurred if bilateral efforts are made to correct ex post misalignments, (3) the setup and running costs associated with the governance structures (often not the courts) to which disputes are referred, and (4) the bonding costs of effecting secure commitments."[4]
By encouraging their customers to disclose more of their personal information, Web services increase the value of the personal data they collect, reuse, and sell with minimal added costs to their operations. The customers create the service's value and increase the value with each bit of personal information they share with the company.
"[C]onsumers may not always realize the extent to which their information has value or earns financial returns for organizations such as [social networking services, but] this value is precisely what sets the economic terms of the transaction for both parties.... Instead of creating and accumulating products that consumers demand, the business model of the [social networking service] is to accumulate consumers to create demand. The consumers are the products, they help create the products with each bit of information they add that deepens their profile, and the [social networking services] encourage both to stimulate demand from third parties for access to these consumers. If this logic holds, then personal information constitutes an asset of specific value to both the consumer and the [social networking service], leading both parties to bilateral dependence in trade. The consumer experiences a loss in value from personal information when [a social networking service] behaves opportunistically with the consumer's personal information, and the [social networking service] experiences a loss in value from the consumer's personal information when the consumer stops providing it to the [social networking service], or when the [social networking service] is otherwise denied the ability to continue to extract rents from third parties on the basis of the personal information."[5]
It favors Web services to keep their customers in the dark about the effect of their operations on the customers. The services transfer transaction costs to their customers.
"Privacy policies allow companies to impose transaction costs upon consumers in several ways. For instance, privacy policies are lengthy. A recent study showed that if consumers actually read them, it would come at a $781 billion opportunity cost."[6]
"A longitudinal study of privacy policies found that they are written above a high school reading level, that they are becoming more difficult to read, and that they are becoming longer (on average, 1,951 words each). Thus, in considering ex ante search costs of consumers comparing different services, the consumer may have to read the equivalent of eight pages of materials per competitor just to evaluate privacy issues."[7]
"Many privacy policies use vague, innocuous-sounding terms to mask third-party information sharing. For instance, retailer Ann Taylor's website claims that it does not share information with third parties, but then states that it shares information with 'specially chosen marketing partners.' Presumably, these 'partners' are not joint ventures in a legal sense, but rather arms-length relationships with third parties."[8]
Data collectors prevent the third parties to whom they sell the information from disclosing to consumers the details of the data they receive from the collectors.
"Database companies prohibit their clients from telling consumers how data were acquired, what data were acquired, and the categories in which the consumer has been placed. One standard contract of a data broker requires that direct marketing to consumers '(i) shall not disclose the source of the recipient's name and address; (ii) shall not contain any indication that Client or Client's customers possess any information about the recipient other than name and address.' Gag clauses prevent transparency and frustrate self-help remedies. They may require [a social networking service] to omit material privacy facts in representations to consumers."[9]
Simply shifting transaction costs from individuals to Web services need not be economically crippling to the services. A viable economic model for the exchange of personal information requires equal bargaining power.
"If the Schumer Box [a mechanism that shifts transaction costs from consumers to the data collectors] were applied to the case of monetization of personal information from consumers by [social networking services], consumers would receive or access reports of trades or sales made with their information by the [social networking service]. In the best of circumstances, the consumer would be able to react to the activities of the [social networking service] per third-party trade, per third-party trading partner, or per [social networking service]. The last of these is possible when consumers are allowed the relatively simple act of exiting their agreements, taking their assets away to another trading partner."[10]
"Ronald Coase provides an economic rationale for intervening in transactions between two private parties. Coase realized that transactions are reciprocal and therefore potentially subject to bargaining between parties, which should take place when 'the increase in the value of production consequent upon the rearrangement is greater than the costs which would be involved in bringing it about.' The first half of his famous 1960 article, The Problem of Social Cost,[11] illustrates the ways in which parties could potentially overcome disagreements without resorting to legal action. But if the parties to the transaction are not endowed with equal bargaining power, such gains may never be realized. The latter half of the Article shows that intervention is not costless, yet there may be a role for governments, because the cost of government intervention may prove to be less than the transaction cost it alleviates. The purpose of intervention would be to equalize bargaining power: to move parties closer to the agreement they would have formed on their own, if there were zero transaction costs."[12]
Web services have a strong incentive to prevent their customers from knowing what personal information they are collecting, how they are using the personal information of their customers, and who they are sharing it with. They maximize profits by transferring transaction costs to their customers. Ironically, the customers are the source of their revenue.
[1] Property Rights in Personal Information: An Economic Defense of Privacy, 84 Geo. L.J. 2413.
[2] Social Networks and the Law: Unpacking Privacy's Price, 90 N.C.L. Rev. 1327.
[3] Id. at 1329.
[4] Id. at 1332-1333, citing Oliver E. Williamson, The Economic Institutions of Capitalism 18 (1985).
[5] Id. at 1349-1351.
[6] Id. at 1358, citing Aleecia M. McDonald & Lorrie Faith Cranor, The Cost of Reading Privacy Policies, 4 I/S: J.L. & Pol'y for Info. Soc'y 543, 564 (2008).
[7] Id., citing George R. Milne, Mary J. Culnan & Henry Greene, A Longitudinal Assessment of Online Privacy Notice Readability, 25 J. Pub. Pol'y & Marketing 238, 243 (2006).
[8] Id. at 1358-1359, citing ANNTAYLOR.COM Privacy & Security Statement, ANN TAYLOR (July 1, 2010), http://www.anntaylor.com/ann/custserv/custserv.jsp?pageName=Privacy&slotId =AT_CustServ_Center_Priv_Main _HTML ("To respect your privacy, Ann Taylor will not sell or rent the personal information you provide to us online to any third party… . In addition, Ann Taylor may share information that our clients provide with specially chosen marketing partners.")
[9] Id. at 1360-1361, citing New Customer Terms, Central Address Systems, Inc. 1 (2011), available at www.cas-online.com/DATACARDS/customerterms.pdf.
[10] Id. at 1367-1368.
[11] R.H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 1 (1960).
[12] Id. at 1368-1369, citing R.H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 1, 2 (1960).
Conclusion: Transparency in formation of the personal-information contract
"The merchants, who possess the right to use the information, have no incentive, initially, to draft their contracts to inhibit disclosure. Thus, the possibility of inefficient outcomes arises, with a consumer who values privacy more than the merchant values the information unable to acquire the rights to the information.... Consumers generally know neither the use to which information is put nor its value; technology has outpaced awareness of technology. Merchants, on the other hand, always know the value, because they are selling the information. It is therefore in the interest of merchants to obtain the information surreptitiously, and contract without reference to it. A privacy rule, however, forces the merchant to bring his unique knowledge out into the open. The consumer becomes better informed and therefore the transaction is more likely to achieve the most efficient allocation."[1]
Existing network architectures work against disclosure to individuals and in favor of data collectors' preference not to share the details of their operations with their customers.
"Ease of transfer, difficulty of monitoring transfer, and persistence of digital data allow [social networking services] to present formidable barriers to anyone attempting to control the flow of value from the personal information that they provide to [social networking services]. Information-intensive companies exacerbate these problems by relying upon consumer ignorance of the rules, masking practices, and shifting practices once they have collected personal information from consumers. Under current structures of governance, there is no exit for consumers who wish to leave [a social networking service]."[2]
The best way to equalize the personal-information transaction costs and benefits is to provide individuals with full disclosure about the collection and use of their personal information, and to give them the ability to lock the personal data that has been collected.
"[A] consumer right to rescind enrollment in [a social networking service], triggering a deletion of information shared with the service, and an ability to export information shared with the service are appropriate given the skewed aspects of personal information transactions."[3]
The longer the relationship persists between individuals and data collectors, the greater the value of the personal information collected and the greater the risk to individuals of loss or misuse of their personal data. This argues in favor of an ongoing contractual relationship that is terminable by either party on demand.
"Signing up for [a social networking service] takes just seconds. However, the relationship can last for a great deal of time and, as such, it resembles other kinds of transactions seen in more visible sectors of networked infrastructures (e.g., finance, water, and communications) — sectors where we have experience and research that leads us to be much more concerned about what happens as time goes on. Similarly, transaction cost economics focuses on the fact that the cost of transacting can rise, uneconomically, after the contract is signed.... Ex post costs of contracting take several forms. These include (1) the maladaptation costs incurred when transactions drift out of alignment… (2) the haggling costs incurred if bilateral efforts are made to correct ex post misalignments, (3) the setup and running costs associated with the governance structures (often not the courts) to which disputes are referred, and (4) the bonding costs of effecting secure commitments."[4]
By encouraging their customers to disclose more of their personal information, Web services increase the value of the personal data they collect, reuse, and sell with minimal added costs to their operations. The customers create the service's value and increase the value with each bit of personal information they share with the company.
"[C]onsumers may not always realize the extent to which their information has value or earns financial returns for organizations such as [social networking services, but] this value is precisely what sets the economic terms of the transaction for both parties.... Instead of creating and accumulating products that consumers demand, the business model of the [social networking service] is to accumulate consumers to create demand. The consumers are the products, they help create the products with each bit of information they add that deepens their profile, and the [social networking services] encourage both to stimulate demand from third parties for access to these consumers. If this logic holds, then personal information constitutes an asset of specific value to both the consumer and the [social networking service], leading both parties to bilateral dependence in trade. The consumer experiences a loss in value from personal information when [a social networking service] behaves opportunistically with the consumer's personal information, and the [social networking service] experiences a loss in value from the consumer's personal information when the consumer stops providing it to the [social networking service], or when the [social networking service] is otherwise denied the ability to continue to extract rents from third parties on the basis of the personal information."[5]
It favors Web services to keep their customers in the dark about the effect of their operations on the customers. The services transfer transaction costs to their customers.
"Privacy policies allow companies to impose transaction costs upon consumers in several ways. For instance, privacy policies are lengthy. A recent study showed that if consumers actually read them, it would come at a $781 billion opportunity cost."[6]
"A longitudinal study of privacy policies found that they are written above a high school reading level, that they are becoming more difficult to read, and that they are becoming longer (on average, 1,951 words each). Thus, in considering ex ante search costs of consumers comparing different services, the consumer may have to read the equivalent of eight pages of materials per competitor just to evaluate privacy issues."[7]
"Many privacy policies use vague, innocuous-sounding terms to mask third-party information sharing. For instance, retailer Ann Taylor's website claims that it does not share information with third parties, but then states that it shares information with 'specially chosen marketing partners.' Presumably, these 'partners' are not joint ventures in a legal sense, but rather arms-length relationships with third parties."[8]
Data collectors prevent the third parties to whom they sell the information from disclosing to consumers the details of the data they receive from the collectors.
"Database companies prohibit their clients from telling consumers how data were acquired, what data were acquired, and the categories in which the consumer has been placed. One standard contract of a data broker requires that direct marketing to consumers '(i) shall not disclose the source of the recipient's name and address; (ii) shall not contain any indication that Client or Client's customers possess any information about the recipient other than name and address.' Gag clauses prevent transparency and frustrate self-help remedies. They may require [a social networking service] to omit material privacy facts in representations to consumers."[9]
Simply shifting transaction costs from individuals to Web services need not be economically crippling to the services. A viable economic model for the exchange of personal information requires equal bargaining power.
"If the Schumer Box [a mechanism that shifts transaction costs from consumers to the data collectors] were applied to the case of monetization of personal information from consumers by [social networking services], consumers would receive or access reports of trades or sales made with their information by the [social networking service]. In the best of circumstances, the consumer would be able to react to the activities of the [social networking service] per third-party trade, per third-party trading partner, or per [social networking service]. The last of these is possible when consumers are allowed the relatively simple act of exiting their agreements, taking their assets away to another trading partner."[10]
"Ronald Coase provides an economic rationale for intervening in transactions between two private parties. Coase realized that transactions are reciprocal and therefore potentially subject to bargaining between parties, which should take place when 'the increase in the value of production consequent upon the rearrangement is greater than the costs which would be involved in bringing it about.' The first half of his famous 1960 article, The Problem of Social Cost,[11] illustrates the ways in which parties could potentially overcome disagreements without resorting to legal action. But if the parties to the transaction are not endowed with equal bargaining power, such gains may never be realized. The latter half of the Article shows that intervention is not costless, yet there may be a role for governments, because the cost of government intervention may prove to be less than the transaction cost it alleviates. The purpose of intervention would be to equalize bargaining power: to move parties closer to the agreement they would have formed on their own, if there were zero transaction costs."[12]
Web services have a strong incentive to prevent their customers from knowing what personal information they are collecting, how they are using the personal information of their customers, and who they are sharing it with. They maximize profits by transferring transaction costs to their customers. Ironically, the customers are the source of their revenue.
[1] Property Rights in Personal Information: An Economic Defense of Privacy, 84 Geo. L.J. 2413.
[2] Social Networks and the Law: Unpacking Privacy's Price, 90 N.C.L. Rev. 1327.
[3] Id. at 1329.
[4] Id. at 1332-1333, citing Oliver E. Williamson, The Economic Institutions of Capitalism 18 (1985).
[5] Id. at 1349-1351.
[6] Id. at 1358, citing Aleecia M. McDonald & Lorrie Faith Cranor, The Cost of Reading Privacy Policies, 4 I/S: J.L. & Pol'y for Info. Soc'y 543, 564 (2008).
[7] Id., citing George R. Milne, Mary J. Culnan & Henry Greene, A Longitudinal Assessment of Online Privacy Notice Readability, 25 J. Pub. Pol'y & Marketing 238, 243 (2006).
[8] Id. at 1358-1359, citing ANNTAYLOR.COM Privacy & Security Statement, ANN TAYLOR (July 1, 2010), http://www.anntaylor.com/ann/custserv/custserv.jsp?pageName=Privacy&slotId =AT_CustServ_Center_Priv_Main _HTML ("To respect your privacy, Ann Taylor will not sell or rent the personal information you provide to us online to any third party… . In addition, Ann Taylor may share information that our clients provide with specially chosen marketing partners.")
[9] Id. at 1360-1361, citing New Customer Terms, Central Address Systems, Inc. 1 (2011), available at www.cas-online.com/DATACARDS/customerterms.pdf.
[10] Id. at 1367-1368.
[11] R.H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 1 (1960).
[12] Id. at 1368-1369, citing R.H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 1, 2 (1960).
Conclusion: Transparency in formation of the personal-information contract
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