Chris Jay Hoofnagle & Jan Whittington, The Price of “Free”
Comment by: David Medine
Published version available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2235962
Workshop draft abstract:
It’s free and always will be.
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” personal information transactions (“PITs”). TCE provides a framework for analyzing PITs even where the price of the product seems to be zero. Free offers employ a form of cross-subsidy, a technique widely accepted in virtually every infrastructure industry, 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.
Part and parcel of a grey market for personal information, 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.” Thus, what may begin as ex ante misalignment between the interests of the firm and consumer becomes ex post maladaptation when the firm realizes the financial gains possible from monetizing the consumer’s personal information.
We then turn to potential governance structures to lessen the propensity of firms to raise transaction costs, in the hope of making exchange, individually and in aggregate for markets and societies, more efficient. At the most basic level, users would be more strongly protected if free services were understood to involve an exchange for value.
One source for legal intervention is the Federal Trade Commission’s “Free Guidelines.” These guidelines will be reviewed in 2012, offering an opportunity to reconsider the fairness of free offers conditioned on provision of personal information. As currently written, they do not directly address PITs. 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, and making the consumer whole. These interventions go beyond the traditional transparency and accuracy requirements suggested by privacy law. Organizational and enforcement characteristics matter; remedies must reduce transaction costs for the industry, in aggregate and inclusive of the cost of implementing the remedy. Robust cancellation procedures, prohibitions on certain uses of information, structures to reinforce consumer choice such as do-not-sell and do-not-track options, increasing the age limit on protections for children, substantive breach notification, and a “data-back guarantee” are necessary to free consumers from free services.