Our paper evaluates the welfare impact of private data regulation in digital markets where consumers are behavioral; i.e., consumers are myopic (or "naïve”) if they do not recognize the impact of their present consumption decisions on their future ones (while sophisticated or "rational" ones are capable to do that!). In multimarket contacts, consumers reveal information about their preferences in one market and can be discriminated in the others. Private data have an economic value, but some consumers are not aware of giving away their data free of charge.
Regulation of the private data market is now perceived as a need

carlo capuano

iacopo grassi

English

Archivio della ricerca - Università degli studi di Napoli Federico II

The right to be informed and the right to be forgotten: welfare implicationsin presence of myopic consumersCapuano, C. , University of Naples Federico II (Italy)Grassi, I., University of Naples Federico II (Italy)Valletta, G., EDHEC Business School (France)JEPA– On Line, November 14-15, 2020 Object of the presentation❑ Our paper evaluates the welfare impact of private data regulation in digital markets where consumers are behavioral; i.e., consumers are myopic (or "naïve”) if they do not recognize the impact of their present consumption decisions on their future ones (while sophisticated or "rational" ones are capable to do that!)❑ In multimarket contacts, consumers reveale information abouttheir preferences in one market, and can be discriminated in the others. ❑ Private data have an economic value, but some consumers are not aware of giving away their data free of charge.❑ A regulation of the private data market is now perceived as a need.carlo.capuano@unina.itIndex of the presentation❑ The economic value of private data.❑ The EU GDPR.❑ A theoretical model:- no market for data (N);- an unregulated market for data (U);- a regulated market for data (R).❑ Welfare analysis❑ Conclusions.carlo.capuano@unina.itThe economic value of private dataThe utilitarian approach to personal data markets:❑ Posner (1978, 1981): the protection of privacy create inefficiencies in marketplaces;❑ Stigler (1980) governmental action may be ineffective;❑ Calzolari and Pavan (2006): restriction of the sharing ofpersonal data creates distortions, inefficiencies, reducessocial welfare.❑ Hirshleifer (1971) and Taylor (2003): competiton amongfirms to collect private data can cause inefficiency(overinvestment, extracosts)  [In all these contributes, consumers are assumed to be rational]carlo.capuano@unina.itThe economic value of private data (2)Behavioral biases hurdle in consumer decision making.❑ Acquisti (2004), Acquisti Grossklags (2007): Privacy decision making is afflicted by incomplete information, bounded cognitive ability, and otherbehavioral biases (overconfidence, myopia, naivity, social norms, …). → Individual effort to privacy protection is inefficient and some regulation is needed.carlo.capuano@unina.it❑ Samuelson (2000): “personal data protection is an interest essential to individual autonomy, dignity, and freedom in a democratic civil society”.❑ The EU Legislator tends to define privacy as a fundamentalhuman right.→ A Personal Data Regulation is a need: the European Union has approved, in 2016, the General Data Protection Regulation (GDPR) (EU 2016/679), having for object data protection and privacy protection for all individuals within the European Union (EU) and the European Economic Area (EEA).Privacy as a human rightcarlo.capuano@unina.itThe EU GDPR❑ Definition of what is a personal data❑ Right to be Informed❑ Right of Data Portability❑ Right to Correction❑ Right to be Forgotten❑ Right to Refuse Profiling❑ Data Protection by Design→ Collecting, protecting, and storing data are now costly.→ Consumers’awareness should increase.carlo.capuano@unina.itThe theoretical model❑We propose a simple model consisting of two separated markets, X(basic good) and Y (luxury good), in monopoly. ❑ The population of potential consumers differs in their income and in their level of myopia.❑Only high-income consumers buy the luxury good. High and low-income consumers buy the basic good.❑ Purchasing data on consumers behavior in market Y,  the firm in X can price-discriminate (by direct marketing proposal).❑ Personal data regulations as the EU GDPR can increase consumers awareness about the treatment of their data and allow them to have their data erased from the data holder.❑We evaluate overall and redistributional welfare effectscarlo.capuano@unina.itConsumers’ characteristicsWe consider a population of potential consumers (size N=1) split in two subgroups: l of high-income consumers 1-l of low-income consumersThe size of the two sub-groups is common knowledge while the consumer type (low or high income) is not observable.❑ High income consumers are the only interested on the luxury good, and have a willigness to pay for good x equal to h (high).❑ Low income consumers are  not interested on the luxury good and have a willigness to pay for good x equal to l<h (low).carlo.capuano@unina.itConsumers’ characteristics (2)Indipendently of income distribution, consumers are (also) split in two subgroups:m of myopic consumers 1-m of sophisticated consumersThen, we haveml myopic high-income consumers, (1-m)l           sophisticated high-income consumers, (1-m)(1-l)    sophisticated low-income consumers,  andm(1-l) myopic low-income consumers.carlo.capuano@unina.itThe timing• At t=1, firm Y sells the luxury good, collecting personal data on served consumers.• At t=2, firm X can buy the list of served consumers in market Y at a unit cost w.• At t=3, fim X can use acquired personal data to discriminate in selling the basic good x.→We consider three alternative scenarios:(N) No market for personal data;(U) Unregulated market for personal data;(R) Regulated market for personal data.carlo.capuano@unina.itMarket YA monopolistic firm Y, produces a luxury good y, purchased by high-income consumers only, whose indirect utility function is:𝑈𝑦𝑖 =𝜃𝑖 − 𝑝𝑦 with 𝜃𝑖~𝑈[0,1]Each consumer purchases only one unit of the good (or none).  As a consequence, the demand for the luxury good is:𝑞𝑦= (1− 𝑝𝑦)𝜆 ≤ 𝜆In the cases of regulated or unregulated markets for personal data,  firm X can sell personal data to firm Y at a unit cost w.carlo.capuano@unina.itMarket XThe monopolist X operates in the market for the good x, demanded both by low and high-income consumers. ❑ In the non-discrimination case, each consumer buys at most one unit of the good x whose price is 𝑝𝑥 (uniform price).  Thus, the indirect utility functions are:𝑈𝑥ℎ= ቊℎ − 𝑝𝑥 𝑖𝑓 𝑥 = 10 𝑖𝑓 𝑥 = 0𝑈𝑥𝑙= ቊ𝑙 − 𝑝𝑥 𝑖𝑓 𝑥 = 10 𝑖𝑓 𝑥 = 0with h>l.  Total quantity is:𝑞𝑥=൞0 𝑖𝑓 𝑝𝑥 > ℎ𝜆 𝑖𝑓 ℎ ≥ 𝑝𝑥 > 𝑙1 𝑖𝑓 𝑝𝑥 ≤ 𝑙carlo.capuano@unina.itMarket X   (2)❑ In the discrimination case, by acquiring data, firm X propose the good:- at a price 𝑝𝑥𝐷 = ℎ to all the high income consumers that revealed their characteristics in market Y (𝑞𝑥𝐷 )- at a price 𝑝𝑥𝑈 = 𝑙 to all the others (1 − 𝑞𝑥𝐷 ).carlo.capuano@unina.itIMPORTANT: Price-discrimination requires private dataN: markets Y and XU: market YIn market  Y sophisticated consumers are aware that revealing their type, they would be discriminated in market X- sophisticated: θi − h − l ≥ pyqy(s) = (1 − h − l − py)(1- m) λ- myopic:                       θi−py ≥ 0qy(m) = (1 − py)mλIn aggregate:          qy = qy m + qy(s) = (1 − h − l (1− m) − py) λcarlo.capuano@unina.itU: market Y (2)A market for data allows firm Y to sell the list of (all) itsconsumers to firm X at a unit price w.Since: 𝜋𝑦 = 𝑞𝑦(𝑝𝑦+𝑤)In equilibrium:𝑝𝑦 =1− ℎ−𝑙 1− m −𝑤2; 𝑞𝑦 =1− ℎ−𝑙 1− m +𝑤2𝜆;𝜋𝑦 =(1− ℎ−𝑙 1− m +𝑤)24𝜆;𝐶𝑆𝑦 =(1− ℎ−𝑙 1− m +𝑤)28𝜆; 𝑊𝑦 =3(1− ℎ−𝑙 1− m +𝑤)28𝜆carlo.capuano@unina.itU: market XFirm X can by the list of 𝑞𝑦, who will receive a direct proposal𝜋𝑥 =൞𝑙 𝑖𝑓 𝑝𝑥 = 𝑙ℎ𝜆 𝑖𝑓 𝑝𝑥 = ℎℎ − 𝑤 𝑞𝑦 + 𝑙(1 − 𝑞𝑦) 𝑖𝑓 "𝑏𝑢𝑦 𝑦 + 𝑑𝑖𝑠𝑐𝑟𝑖𝑚𝑖𝑛𝑎𝑡𝑒 𝑖𝑛 𝑥"- buy data at unit price w,  discriminate by direct marketing fixinga price 𝑝𝑥𝐷 = ℎ to 𝑞𝑦, and a price 𝑝𝑥𝑈 = 𝑙 to 1 − 𝑞𝑦In equilibrium:• Fixing 𝑝𝑥 = 𝑙 to all the consumers is dominated by discriminationiff ℎ − 𝑙 > 𝑤• if 𝜆 ≤ 𝜆𝑈 then𝑝𝑥𝐷 = ℎ, 𝑝𝑥𝑈 = 𝑙, 𝑎𝑛𝑑 𝑞𝑥 = 1• if 𝜆 > 𝜆𝑈 then non− discrimination 𝑝𝑥 = ℎ 𝑎𝑛𝑑 𝑞𝑥 = λℎ < 1carlo.capuano@unina.itbuysIt buys discriminatesR: right to be forgotten in market YSophisticated and myopic: 𝜃𝑖 − 𝑝𝑦 ≥ 0𝑞𝑦(𝑠) = (1 − 𝑝𝑦)(1- m)𝜆𝑞𝑦(𝑚) = (1 − 𝑝𝑦)m𝜆In aggregate: 𝑞𝑦 = (1 − 𝑝𝑦) 𝜆Since: 𝜋𝑦 = (𝑞𝑦𝑝𝑦 + 𝑞𝑦 𝑚 w)In equilibrium:𝑝𝑦 =1−m𝑤2; 𝑞𝑦=1+m𝑤2𝜆;𝜋𝑦 =1+m𝑤 24𝜆; 𝐶𝑆𝑦=1+m𝑤 28𝜆; 𝜋𝑦 =3 1+m𝑤 28𝜆;carlo.capuano@unina.itR: Market X𝜋𝑥 =൞𝑙 𝑖𝑓 𝑝𝑥 = 𝑙ℎ𝜆 𝑖𝑓 𝑝𝑥 = ℎℎ − 𝑤 𝑞𝑦(𝑚) + 𝑙(1 − 𝑞𝑦(𝑚)) 𝑖𝑓 "𝑏𝑢𝑦 + 𝑑𝑖𝑠𝑐𝑟𝑖𝑚𝑖𝑛𝑎𝑡𝑒"- buy data at unit price w- discriminate by direct marketing fixinga price 𝑝𝑥𝐷 = ℎ to 𝑞𝑦(𝑚), and a price 𝑝𝑥𝑈 = 1 − 𝑞𝑦(𝑚)In equilibrium:• Fixing 𝑝𝑥 = 𝑙 to all consumers is dominated by buy/discriminate iffℎ − 𝑙 > 𝑤• if 𝜆 ≤ 𝜆𝑅 then 𝑝′𝑥 = ℎ 𝑎𝑛𝑑 𝑝𝑥 = 𝑙, 𝑞𝑥 = 1• if 𝜆 > 𝜆𝑅 then "non − discrimination", 𝑝𝑥 = ℎ, 𝑞𝑥 = λℎcarlo.capuano@unina.itqpyqipy0 1Py(py)qy=1-pyCS(py)N: market for Y pycarlo.capuano@unina.itqq - (h-l)pyqNqSU: market Y qipy01carlo.capuano@unina.itqmqq - (h-l)pyq0qsq’m = q’sqmR: market Y qipy0 1carlo.capuano@unina.it(1-m)wR vs. U❑ 𝜆𝑈 > 𝜆𝑅 > 𝜆𝑁 :  regulation reduces the set of parameters such that 𝑞𝑥 = 1: less consumers in market y reveale theirtype, reducing profitability of discrimination in market x.❑ 𝑞𝑦(𝑚) is larger in U than in R, while 𝑞𝑦(𝑠) is larger in R than in U: we have redistributional effects between the types of consumers; i.e., sophisticated consumers benefit by the regulation, myopic ones hurt. ❑ Overall effects depend on the size of myopic consumers:  total welfare is higher in R than U iff m > m𝑅 .❑ If regulation reduces m (higher awareness), total welfare decreases.❑ [other] If compliance costs increases w, total welfare decreases.carlo.capuano@unina.itThe right to be informed• The right to be informed increases consumersìawarness; this, means the percentage of myopicconsumers  m decreases.• In any scenario, a reduction of m  negatively affectwelfare: markets need of naive consumers otherwise, without private data discrimination in the market X is not profitable!• The net impact of the right to be forgotten and the right to be informed depends on the initialproportion of myopic person. Is too low, the net impact of the regulation is univocaly negative.carlo.capuano@unina.itConclusions❑ Data Protection Regulation is not univocally welfare-enhancing: the size of myopic consumers matters!❑ Redistributional effects occurs between types of consumers (+ sophisticated, - myopic).❑ Compliance costs reduces benefits from the regulation: 7.8 billion USD extimated in 2017 (direct effect only!).❑ The applicabilty of the regulation only to «European firms» can create them competitive disadvantages in the worldwidemarket.❑ Only the Japan’s Act of Protection of Personal Information (2013) goes in the same direction of the EU GDPR; USA, China, South Korea do not seem to care!carlo.capuano@unina.itThanks for your attentionAny questions?carlo.capuano@unina.it

The Right to be Informed and the Right to be Forgotten. Welfare Implications in Presence of Myopic Consumers

https://www.iris.unina.it/bitstream/11588/823385/1/CGV%20JEPA%202020.pdf

The Right to be Informed and the Right to be Forgotten. Welfare Implications in Presence of Myopic Consumers

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Archivio della ricerca - Università degli studi di Napoli Federico II