Externalities in the Demand for Privacy: Evidence from the Do-Not-Call Registry

Externalities in the Demand for Privacy: Evidence from the Do-Not-Call Registry Khim-Yong Goh, NUS Kai-Lung Hui, HKUST I.P.L. Png, NUS

Privacy and Regulation • “Privacy is a fundamental right that people do care about.”Pamela Jones Harbour, Commissioner of U.S. FTC • Existing research has been lagging behind: • Surveys and laboratory experiments • Little empirical research about real behavior • Mostly study direct benefits/costs of privacy, not externalities between consumers WISSP, October 2010

Externalities • How one person’s decision affect others • Pollution, public good, etc. • Two types of externalities among consumers related to privacy • Preference externalities: How consumers’ product preferences affect others • Strategic marketing avoidance: How consumers’ marketing avoidance efforts affect others WISSP, October 2010

Research Objectives • Using real registration data from the U.S. Do Not Call Registry: - • Identify the presence of preference externalities vis-à-vis strategic marketing avoidance in the demand for privacy • Draw implications on optimal government intervention and vendor responses WISSP, October 2010

Theory – Preference Externalities • Reasons for preference externalities • Fixed costs in retailing  limited products • Incomplete information on consumer preferences  product configuration based on aggregate attributes, e.g., age and gender • These apply equally well to direct marketing • Within-segment: demand  when the size of the same segment increases • Cross-segment: demand  when the size of other segments increases WISSP, October 2010

Theory – Preference Externalities • The larger the size of a demographic segment  the more likely a person will find the products that she wants via direct marketing the less likely that she will sign up for DNC • H1 (Preference externalities): Marketing avoidance in a particular demographic segment would decrease with the size of that segment WISSP, October 2010

Theory – Strategic Marketing Avoidance • Vendors ignore harms caused by solicitations • Consumers avoid marketing when the harms exceed the benefits from direct marketing • Marketing avoidance facilities serve to “filter” the population for vendors • What would vendors do when the population becomes “richer”? • How would remaining consumers respond? WISSP, October 2010

Theory – Strategic Marketing Avoidance • In general, larger consumer segments  stronger impact on vendors’ expected profits due to marketing avoidance  stronger strategic complementarity • H2 (Strategic marketing avoidance): Marketing avoidance in a particular demographic segment would increasewith the size of that segment WISSP, October 2010

The DNC Registry • Fixed line and mobile, not business numbers • Telemarketers must check phone numbers against DNC no less frequently than 31 days • Registrations were indefinite • Desirable characteristics • Real observations of consumer choices • Free service, low sign up cost, and no competition • Covers entire USA; lots of variations in consumer demographics across regions WISSP, October 2010

Data Sources, Issues, etc. • County- and MSA-level population data from U.S. Census Bureau Our equilibrium state WISSP, October 2010

Preference Externalities: Evidence WISSP, October 2010

Marketing Avoidance: Evidence • There was concomitant increase in consumer purchase of directly marketed items and marketing avoidance WISSP, October 2010

Empirical Model -ve preference externalities +ve strategic marketing avoidance • DNC registration rates: • With help of population data, specifically, • Integrating the above equations, WISSP, October 2010

SMA among Hispanics and non-Hispanics Results PE among less-educated people SMA among high-income people SMA among non-Spanish-only speakers WISSP, October 2010

Robustness Different equilibrium states Perhaps the effects were due to direct communications? Maybe consumer heterogeneity mattered? WISSP, October 2010

County-Level Markets • DNC registration rates: • Estimation equation, • Within-segment parameters could be identified, but not cross-segment parameters WISSP, October 2010

County-Level Markets: Results Fairly consistent with the MSA-level results… WISSP, October 2010

Summary of findings • Strategic marketing avoidance: High income, age, Hispanic ethnicity, non-Spanish-only speaking consumers • Preference externalities: Less educated consumers • Waldfogel (2003, RJE) and George and Waldfogel (2003, JPE): Preference externalities among black, white, and Hispanic ethnicity, but not education in radio and newspaper markets • Our (telemarketing) results are opposite WISSP, October 2010

Implications (1) • Evidence of strategic marketing avoidance  low-value consumers opted out  More profitable “market” for the vendors  Opt out facilities could indeed be helpful to vendors! WISSP, October 2010

Practical Suggestions • Direct marketers should support “opt out” facilities because such facilities help refine marketing lists • Once this is understood, there will be less need for government to offer such services • Should not “over-respond” to such refinement of marketing lists • (otherwise “profitable”) Consumers may strategically respond by opting out • Possible exception on competition law so that direct marketers can agree to limit solicitations? WISSP, October 2010

Implications (2) • Preference externalities segmented by education  either: • Telemarketers have not segmented markets by education fine enough, or • Product customization is too low in that market • Perhaps refine offering by education level? • Financial/investment services, or educational services… WISSP, October 2010

Concluding Remarks • Evidence of externalities  strong justification for government regulation of privacy • These are beyond “standard” reasons, such as consumer myopia or protecting vulnerable segments, e.g., children WISSP, October 2010

Thank you! WISSP, October 2010

Externalities in the Demand for Privacy: Evidence from the Do-Not-Call Registry