What would Coase say about paying for privacy?

Today’s world is trapped into the social media marketing superpower, omnipresent behavioural advertising and business models based on extensive personal data collection. Ordinary internet users are struggling with the right response, since the only alternative they see is to abstain from using the internet (which is, for most of them, a sacrifice too big to make). It therefore comes as no surprise that the academia has shown great interest in resolving the tensions triggered by the technological developments and searching for the solutions that would restore the balance in global economy.

Recently, we could read about Tufekci's proposal to offer a monthly fee to Facebook (FB), which would preserve her FB wall as private space, shared only with people she chooses and likes. The fee would be a repayment for not being overwhelmed with ads and sponsored posts. In essence, what she proposes is to convince Facebook to adopt the so-called freemium model, where privacy-conscious users would choose to pay an additional monthly fee in exchange for their privacy. This would be the premium FB version. The rest of the users could still use the standard FB model, a free one.

As it has been already raised, there is a serious problem with the idea of paying for privacy. Most notably, the reason is in its alienability, since privacy is a fundamental right, at least as it is understood in Europe.  

But let explore the idea of paying for privacy without taking into account the human rights dimension and the actual entitlements of privacy rights. Some weeks ago I read Purtova's paper describing the idea of privacy as property and it occurred to me that it would be great to analyse it from the economic point of view by, for instance, applying Coase's theorem. Well, I soon discovered there were actually quite some people that had already got the same idea, for example dr. Noam. 

In her paper Noam applies Coase’s theory to a telephone solicitation case. This is how she puts it: we have two parties in a telephone solicitation call, each of them with a certain utility to their preference. For example, it may be worth $3 to the telemarketer to have an opportunity to talk to the consumer. If necessary, she would be willing to offer a potential customer up to that amount. Conversely, the consumer would be willing to pay up to, say, $4 to the telemarketer to keep her off the phone. The $4 is the value he places on his privacy in this instance. Thus, if the telemarketer has a legal right to call him at home, he would “bribe” her not to call, in order to keep his peace and quiet. If the right is with the consumer, the marketer would pay the consumer to allow him a call.

What is important is that regardless of the initial entitlement of the rights, the final outcome would always be an optimal, most efficient and mutually beneficial distribution.

Let’s now take this example further and apply it to Tufekci’s proposal to repay FB. FB claims it makes about 20 cents per user per month in profit by using the business model of intensive behavioural advertising. If we value our privacy (in Warren and Brandeis' words -  the right to be left alone) more, say 25 cents per month, it surely makes sense to pay this insignificant amount to FB and live happily (free of ads) ever after.

There are however quite some problems related to this simple concept. Two of them were already mentioned above – the first one is the nature of privacy as a fundamental right and the impossibility of its propertization. The second is the economic unattractiveness of freemium as a prospective business model.

Lastly, Coase himself makes it clear that the theorem only works in the world of no transaction cost and no market failures, and requires a symmetry of information between the parties. This is currently not the case with FB. People are not aware of how much their data is actually worth to FB (information asymmetry) and although the transaction cost online are considerably lower, market failures, as Noam points out, are the main issue. Personal data is valuable because it can be shared with third parties. When someone becomes a FB user (i.e., enters in a contractual relation with FB), he/she consents to a very broad data sharing. If  data is shared with, e.g., 100 firms, a user would have to repay all of them to really secure his privacy. The “public good” nature of information permits free riders and that would result in an excessive monthly cost for a user to fully secure his privacy. What is more, the situation could even lead to discrimination, since only rich people could afford paying for privacy. 

Actually, I wish I could pay 25 cents per month to FB and all my troubles would be resolved. But for the time being, this seems to be a utopia. And effective data protection regulation, where initial entitlements are defined by the legislator, thus remains a better solution (if only it is followed consistently).

Coase
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