Privacy and Business

Consumers have already made a Faustian bargain with business when conducting any non-cash transaction. Digital transactions and payments leave retraceable trails so any and all data imparted is in the public sphere. There is directionality to this economic connection, since once information is sent from buyer to seller, it cannot be retrieved or retroactively erased. In many instances, more information than strictly necessary is imparted in exchange for price discounts for merchandise (or freebies).

Most of us divulge personal data routinely on social media, search engines and shopping web sites, allowing third parties to commercialize this data. In addition to voluntary sharing of information, social media enable (even encourage by providing the tools) surreptitious private surveillance which is more commonly known as stalking. This process uncovers data that are already “out there” - it is often simply a matter of connecting the dots and uncovering the pattern of an individual’s life. We litter our public space with intimate details of our lives, in tiny crumpled pieces of data that we think are only worthy of disposal. Just as governments pore over the trash of potential terrorists, these pieces of data can be stringed together in a private surveillance effort. While there are rights to privacy, there are also freedom of speech rights, so does each individual have the responsibility to watch what he throws away or does the voyeur have the responsibility to exercise restraint? I believe that just as you are a visible public figure whenever you enter public spaces, like walking on a street, your personal information is public as soon as you digitally connect with the world. Gossip, in the pre-binary days, was based simply on hear-say and not hard evidence; in the digital world, we inadvertently leave a trail of evidence.

A recent survey by the Pew Research Center found that while the notion of privacy on the Internet means different things to different demographic groups, the overall concern is that their personal information is no longer secure. Eighty percent of individuals who use social networking sites feel insecure about the use that advertisers might make of the information shared on these sites. Furthermore, 80 % of adults agree that the public should be concerned about government collecting data via phone and Internet communications. Paradoxically, 55 % of those surveyed would share information in order to obtain some online services for free.

Landlines were considered the most secure form of communication; 67 % of adults surveyed felt secure or very secure about landlines compared with 39 % feeling secure about text messages and 40 % about email [102].

Think of the information market as consisting of suppliers (consumers who reveal preferences through search and transactions), intermediaries who collect, curate and store this information and final users or firms that buy this aggregated data to improve products and prices. Mann [103] makes the case that there are economies of scale and scope associated with information. The economies of scale arise due to the increasing value of information aggregated across time for a single individual. To the extent that an individual’s behavior is correlated across time, knowing a customer’s history allows the firm to generate a finer picture of his preferences. Economies of scope are generated when information is aggregated across wide swaths of consumers, allowing firms to tailor products to specific groups, and also price discriminate more efficiently, by charging different prices to groups with similar characteristics.

Thus, customers face a tradeoff between hiding and sharing data. For example, it is more convenient to share personal information with a bank in order to facilitate online banking. But it may be costly (in terms of loss of privacy) to share this same information with a retailer who might himself face a tradeoff between guarding this information or selling it to third parties. Further, consumers may face bounded rationality in that they may undervalue the cost of revealing information. Innocently providing phone numbers and email addresses at point of sale, which is unnecessary for most transactions, allows the business to initiate communication with the individual precipitating a string of interactions. From a policy perspective, how should this tradeoff be balanced? As Mann writes,

Policy makers and businesses as well differ in their response to the limited rationality of consumers. The EU Privacy Directive is at one extreme, disallowing the collection and retention of personal information on the grounds that consumers don’t know what they are giving up. Other policy approaches require active consent (opt-in) or more transparency (‘this website uses cookies.... click here for our cookie policy’). [103]

Malevolent use of customer information is a larger concern than that of information use by third parties for commercial reasons. There is the more important problem, and one that is occurring more frequently, of data breaches. If valuable financial information is stolen from a credit card database, it could compromise multiple consumers. Disclosure of data breaches is necessary not only for transparency but also for calculating costs and benefits of providing and protecting information, and of assigning responsibility and costs in the case of a data breach.

The target data breach in the fall of 2013 focused on credit card transactions. The company passed on some of the blame on credit card companies for failing to use the chip-and-pin technology (widely used in Europe), which would have minimized the likelihood of this data breach.

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