Law, Economics, and Privacy: Implications of Government Policies on Website and Third-Party Information Sharing

Abstract

Widespread abuse of internet users' privacy online has prompted user advocacy groups to implore governments to intervene and protect consumer rights. To study such interventions' effects, we examine data-protection policies that policy makers and governments can enforce on websites, including consent-based user information sharing and subsidizing competing websites. Interestingly, we find that even though a consent-based policy may improve user surplus, it has the unintended consequence of increasing the number of third-parties and, thus, sharing of user information. We also determine that both consent-based and website subsidization policies may reduce competition by driving websites out of the market—to the detriment of user surplus and social welfare. Moreover, consent-based policies are not beneficial to websites, but are beneficial for third-parties. Policy makers should consider the different policy mechanisms at their disposal. Website subsidization is similar to a scalpel, enabling them to sculpt around and impact specific target markets. Consent-based policies are more comparable to a sledgehammer that uniformly affects all market segments. For circumstances where it is difficult for the government to enact a law for the entire market, website subsidization policies may be appealing alternatives, as they may yield higher user surplus than consent-based policies.