Chapter 1: Theory of Markets and Privacy



A. Markets, Self-regulation, and Government Enforcement  in the Protection of Personal Information

B. Privacy and Self-regulation: Markets for Electronic Privacy
 

C. Economic Aspects of Personal Privacy
 

D. Extensions to the Theory of Markets and Privacy: Mechanics of Pricing Information
 

E. Self-regulation on the Electronic Frontier:
Implications for Public Policy

 

F. "Whatever Works"--The American Public's Attitudes Toward Regulation and Self-regulation
on Consumer Privacy Issues

 

G. The Limits and the Necessity of Self-regulation:
The Case for Both

 

H. Children's Privacy and the GII

 



Markets, Self-Regulation, and Government Enforcment in the Protection of Personal Information

Peter P. Swire(1)


 

Let's begin with a sense of the problem. Imagine that one day your bank or telephone company puts all of your transaction or phone records up on a Web site for the world to see. Imagine, more realistically, that the company without your permission simply sells your records to another company, for use in the latter's marketing efforts. A broad consensus would agree that posting to the Web site is undesirable. Many people would also object to the sale of personal information without the customer's permission.

Assuming that there can be significant problems in the protection of personal information, the next question is to ask what institutions in society should be relied upon to address such problems. This paper examines the chief institutions for protecting personal information. One institutional solution is to rely on the market. The basic idea is that the reputation and sales of companies will suffer if they offend customers' desires about protecting privacy. An opposite institutional approach would rely on government enforcement. The basic idea is that enforcement of mandatory legal rules would deter companies from abusing people's privacy.

A significant element of current thinking about privacy, however, stresses "self-regulation" rather than market or government mechanisms for protecting personal information. Numerous companies and industry groups have promulgated self-regulatory codes or guidelines for the use of personal information. This article is part of a broader study by the National Telecommunications and Information Administration (NTIA) about the uses and limitations of self-regulation. The NTIA has also already given (somewhat qualified) support for a self-regulatory approach for the control of personal information in telecommunications.1

Today we face a special urgency in deciding how to use markets, self-regulation, and government enforcement to protect personal information. There is a widespread and accurate sense that a greater amount of personal information is being assembled in databases, and that more and more people have the computer and telecommunications resources to access and manipulate that personal information. The economics and technologies underlying use of personal information are fundamentally changing. These changes, in turn, make it quite likely that we will need to change the institutional arrangements governing use of personal information.

The protection of personal information arises in a wide and growing range of industries. A partial listing might include: health records; credit history; banking transactions; local and long-distance telephone calls; pay-per-view, VCR rental, cable, and other video records; records of an Internet service provider; and purchases made through direct mail or telephone ordering. This paper cannot hope to determine the best mix of markets, self-regulation, and government for protecting privacy in all of these diverse industries. This paper instead provides an analytic framework for understanding privacy issues in a wide range of industries. Armed with the analytic framework, we will not only understand more clearly what is meant by "self-regulation," but we will identify the empirical issues that are likely to be crucial in deciding when self-regulation should be preferred over market or government approaches.

The structure of the paper is as follows. Throughout the paper, in order to make the analysis easier to follow, examples will be drawn from a hypothetical "Internet Commerce Association" (ICA), whose members sell products over the Internet. Part I lays out the pure market and pure government enforcement models for protecting privacy, showing how either markets or government could in theory assure the desirable level of protection for personal information. Part II highlights the important market failures and government failures that make it unlikely that either markets or government, acting alone, will do as good a job as we would like of achieving both privacy and other social goals such as efficiency.

If markets and government are unsatisfactory, then we become more tempted to explore self-regulatory approaches to privacy. Part III defines "self-regulation," stressing how industry regulation has the same separation-of-powers structure as government regulation: industry can have a special role in legislation (drafting the rules), enforcement, or adjudication. It is not enough to be for or against self-regulation; instead, one must be clear about whether self-regulation is desirable at each stage of the process. Once self-regulation is defined, Part IV makes the case for why it may be better than either markets or government. Notably, self-regulation might take advantage of industry expertise and the possibility of community norms. Self-regulation can produce certain sorts of collective goods, such as technical standards or an enhanced industry reputation for protecting privacy. Self-regulation can also prove useful when the alternative is mandatory and perhaps less desirable government regulation. Part V then provides the key criticisms of self-regulation. It critiques the rationales offered in Part IV, and examines the longstanding worry that self-regulation will promote cartel behavior and other possible bad effects on third parties. Finally, the Conclusion summarizes the discussion and highlights the key empirical issues for comparing markets, self-regulation, and government in the protection of personal information.

THE PURE MARKET AND PURE ENFORCEMENT MODELS FOR PROTECTING PRIVACY

The overall task of this paper is to understand the roles of markets, self-regulation, and government in protecting personal information. An initial step is to see how well privacy might be protected by a system based entirely on the market--the pure market model--or entirely on the government--the pure enforcement model.2

Under the pure market model, the incentives for industry to protect privacy are entirely financial. The assumption, for now, is that there is no legal enforcement against a company that discloses personal information about its customers. Customers can be directly attracted by a strong privacy protection policy or repelled by breaches of privacy. In at least some instances, privacy may be a salient enough marketing point to induce consumers to switch from one company to another. For example, AT&T has advertised nationally that it will not use customer calling records to contact potential new customers, the way that MCI apparently has done under its "Friends and Family" program. As such, a company's privacy policy may become part of its overall marketing effort to develop brand equity and an image of quality service. Bad customer experience or bad publicity about the company's privacy practices can detract from the company's total reputation for quality. Even more broadly, an entire industry might be able to gain sales by developing a reputation for protecting privacy. To take a famous example, Swiss banks as an industry undoubtedly benefitted historically from a strong reputation for guarding customers' privacy.

In the pure market model so far described, there are two important constraints on companies' privacy policies. The first restraint comes from consumer preferences. The more that some or all consumers are willing to change their purchasing decisions based on privacy policies, the greater the market discipline on companies. The second restraint comes from publicity about companies' privacy practices. Publicity affects customers' choices by making them better informed about which companies are meeting their preferences. The prospect of such publicity encourages companies to conform to customers' preferences. Publicity over time may also shape consumers' preferences, such as by making them more concerned as a group about possible privacy problems. The pure market model thus has a dynamic component, in which both customer preferences and company practices can evolve over time as awareness and concern about privacy themselves evolve. The effectiveness of publicity as a constraint on companies will depend on factors such as how well the media can detect privacy problems, how widespread reporting on the issue becomes, and how strongly customers will react to the stories.

At the opposite extreme from the pure market model is the pure enforcement model. The assumption here is that market discipline is largely or entirely ineffective at protecting individuals' privacy. Instead, vindication of individuals' privacy rights occurs through legal enforcement. Privacy rules are defined by the government, whether by statute, agency regulation, or decision of the courts. Designated parties, such as a government agency or the citizen who has been wronged, are allowed to sue to enforce those rules. The suits seek to achieve the twin goals of compensation and deterrence. Compensation takes place when the individual whose privacy is violated is paid to the extent of the violation. Deterrence is focused on the incentives of the corporation--the corporation that violates privacy should face an expected cost for violating privacy (in the form of compensatory payments plus fines) that exceeds its expected benefit from its bad privacy practices.
 

LIMITATIONS OF THE PURE MARKET AND PURE ENFORCEMENT MODELS

In theory, either the pure market or the pure enforcement approach could lead to optimal protection of privacy. If market discipline is strong enough, then companies will find it unprofitable to use personal information in ways that customers find objectionable. If the legal rules are correctly defined, and enforcement is effective enough, then companies will similarly be deterred from violating customers' privacy. In practice, there are important limitations upon the extent to which either markets or legal enforcement will protect privacy. This section of the paper discusses some key market failures and government failures that arise in the protection of privacy. Once the nature of these failures is appreciated, we will be in a better position to explore the uses of self-regulation.
 

Market Failures

The extent of market imperfection is measured against the goals of privacy protection--how much do the actual workings of the market differ from the ideal? The privacy literature to date has emphasized individuals' personal or human rights to control information about themselves. This human rights approach is especially prominent in the regime of data protection in Europe. The approach was developed primarily with respect to data collection by governments, where individuals are subject to the coercive power of the state and forced to reveal sensitive data.

The topic of self-regulation, by contrast, arises with respect to data collection and use by non-governmental enterprises.3 A thesis of my own ongoing research is that data collection by private enterprises should be examined in terms of the contractual relationship between the company and the customer.4 Examples include the deposit contract a customer has with a bank, or terms affecting privacy in a contract for sale with a member of the Internet Commerce Association. For reasons that will be explained more fully in my forthcoming work, there are important advantages to analyzing the privacy issues of private companies as a matter of contract. Not least of these is the simple fact that the legal relationship between consumer and company has historically been treated under the law of contracts. Any rules protecting customers' privacy will need to be integrated with that body of law.

Market failure can be defined with respect to either the human rights or contractual approaches to the protection of personal information. Under the human rights approach, the goal is to protect individuals' right to privacy according to the moral theory that defines the right. A pure market model will fail to the extent that it protects privacy less well than is desirable under the moral theory. Under the contractual approach, the primary goal is to understand what well-informed parties would agree to, if there were no costly hurdles to their reaching an agreement. A pure market model will fail to the extent that it protects privacy less well than these parties would have agreed to, if they were fully informed and had some equality of bargaining power. The focus of the discussion here will be on market failure under the contractual approach.5

The key market failures with respect to privacy concern information and bargaining costs. The information costs arise because of the information asymmetry between the company and the customer--the company typically knows far more than the customer about how the information will be used by the company. A member of the ICA, for instance, would have ready access to details about how customer information will be generated, combined with other databases, or sold to third parties. The customer may face significant costs simply in trying to learn and understand the nature of a company's privacy policies.

The costs of learning about companies' policies are magnified by the difficulty customers face in detecting whether companies in fact are complying with those policies. Customers can try to adopt strategies for monitoring whether companies have complied. For instance, if a person contracted with several companies that promised not to sell her name to third parties, she could report a different middle initial to each company. She could then identify the company that broke the agreement by noticing the middle initial that later appeared on an unsolicited letter or e-mail. These sorts of strategies, however, are both costly (in time and effort) and likely to be ineffective. A member of the ICA, for instance, could use existing technology to cross-check her address with her real name, and thereby insert her correct middle initial.

The cost and ineffectiveness of monitoring logically leads to over-disclosure of private information. Consider the incentives facing a company that acquires private information. That company gains the full benefit of using the information, notably in its own marketing efforts or in the fee it receives when it sells the information to third parties. The company, however, does not suffer the full losses from disclosure of private information. Because of imperfect monitoring, customers often will not learn of that use. They will not be able to discipline the company efficiently in the marketplace for its less-than-optimal privacy practices. Because the company internalizes the gains from using the information, but can externalize a significant share of the losses, it will have a systematic incentive to over-use private information. In terms of the contract approach, companies will have an incentive to use private information even where the customers would not have freely bargained for such use.

Not only are there imperfections in the ability of consumers to learn about and monitor a company's privacy policies. The problems are exacerbated by the costs of bargaining for the desired level of privacy. It is a daunting prospect for an individual consumer to imagine bargaining with a distant Internet marketing company or a huge telephone company about a desired privacy regime. To be successful, bargaining would likely require a considerable degree of expertise in privacy issues, as well as a substantial commitment of time and effort. The cost of this elaborate bargaining process is likely to exceed the incremental benefit in privacy to that citizen.6 The temptation for the ordinary consumer will be to free ride, and hope that someone else will negotiate a more favorable privacy regime. In addition, the benefits of the bargain would be undermined by the cost and difficulty, already discussed, of monitoring the company's compliance with its announced privacy policies.
 

Government Failures

These substantial market failures must be considered together with substantial governmental failures. The pure enforcement model above posits a rosy picture of government regulation in which optimal rules are enforced with perfect accuracy, all at minimal cost. Even for government's greatest supporters, the real world of government regulation is likely to appear considerably different. Once we better understand both market and government failures, we will see more clearly the attraction of a self-regulatory approach to privacy protection.

Government failures where officials seek the public interest. In order to understand the most important types of governmental failure, assume for the moment that the government actors are public spirited. That is, assume that the people drafting and enforcing the rules are competent, well-informed, and wish to achieve the public good in the area of privacy protection.7 Even under these optimistic assumptions, government privacy regulation will lead to administrative costs on government and taxpayers, and compliance costs on industry.

Administrative costs include the expense to the government of drafting privacy rules, administering the rules, and enforcing the rules in particular cases. In the modern state, all of these functions might take place within a particular government agency. For instance, a rule might be promulgated by the agency under the Administrative Procedure Act, administered by agency personnel, and adjudicated by an Administrative Law Judge. It is also possible for mandatory government rules to take place outside of an agency, such as when rules are drafted in the legislature and enforced in a court. No matter how these functions are allocated between the branches of government, taxpayer funds are usually needed to pay for the government regulatory activities. The amount of funding can clearly be substantial.

Industry will incur a variety of costs in complying with the government regulation. It would not be accurate, however, to say that all costs incurred by industry are a measure of governmental failure. Where privacy rules are well drafted, the government regulatory system will have net benefits compared to a system without regulation. That is, the gains resulting from compliance with the regulations will outweigh the costs incurred by the company in molding its behavior to the regulation. For regulation of ICA members, a particular disclosure rule might have relatively small costs to industry, such as the cost of placing the privacy disclosure forms on their Web site. The rule might also have relatively large benefits to consumers, such as if the disclosure enables a significant number of customers to choose a level of privacy protection that they prefer. In considering this sort of net-beneficial rule, governmental failure arises to the extent that a different rule would have even lower compliance costs for industry or even greater benefits for consumers.8

Although the range of possible compliance costs is wide, it is helpful to mention a few that may be especially relevant to the privacy discussion. One important factor in determining the size and type of compliance costs is the degree of precision in the regulation.9 Enforcement by the government can be based on fairly precise rules, stated in advance. These sorts of rules give clear notice to industry of what is expected, and it is relatively inexpensive to determine whether industry has violated a precisely-stated rule. The chief problem with precise rules is that they tend to be both over- and under-broad. They are over-broad whenever there are net benefits from using the information, but the rule prohibits such use. A rule, for instance, might prohibit uses of personal information that consumers, if asked, would approve. Rules are under-broad whenever there are net costs from using the information, but the use is nonetheless allowed. The rule, for example, might instead let a company use information in ways that a customer would find highly objectionable. One way to avoid the over- and under-breadth problem is by using vague standards instead, such as the injunction to "act reasonably under the circumstances." These vague standards create their own compliance costs, however. Industry lacks clear notice of what is expected, and expensive trials may be needed after the fact to determine what was reasonable in a particular case. In short, where rules are either precise or vague, there are likely to be significant costs to industry in complying.

Another compliance cost to industry arises from the inflexibility of government rules. Simply put, it is often difficult to change government rules, even when there is a consensus in the agency and policy community that such change is appropriate. Anyone experienced in Washington is likely to have favorite examples of this inflexibility.10 The problem of inflexibility is likely to be particularly acute during a period of rapid technological and market change--rules promulgated under one set of assumptions will make less sense when the technical and economic realities change. Today, the uses of personal data seem to be undergoing just this sort of rapid change. Vast amounts of public records are coming on-line, new industries are arising to mine for public and private data, and advances in computers and telecommunications are distributing the ability to create customer profiles to an unprecedented array of users.

Today's rapid changes present a dilemma for those interested in creating legal rules to protect privacy. On the one hand, the inflexibility of government rules suggests that rules passed today may create substantial compliance costs, because the rules will not adapt smoothly enough to changing market and technical realities. On the other hand, the heightened risks to privacy lead many to conclude that the need for mandatory rules is greater than before. In assessing the degree of government failure, an important question will thus be the degree to which legal rules can keep up with changes in markets, technology, and the protection of privacy.

Government failures and public choice problems. The discussion of government failures to this point has assumed that the government officials are competent and seek to achieve the public good in the area of privacy protection. If government officials are incompetent, then it follows that the costs of regulation will likely be greater and the benefits smaller. Perhaps of even greater importance, government officials may not faithfully follow the public good. Instead, as emphasized by public choice theory, officials may be influenced by powerful interest groups, or may themselves seek other goals, such as an increase in their agency's turf.11

In considering the effects of interest groups on privacy law, it is not necessarily clear whether the political process will tilt toward either the industry or consumer position. First consider what will occur when the industry position dominates politically. We will expect less thorough regulation to protect privacy than would be promulgated in the public interest. The industry might succeed, for instance, in having government enact the precise rules that the industry itself would write under self-regulation. Indeed, government rules could be even more protective of industry than self-regulatory ones. Industry has an incentive to use government rules as a shield to preempt any contrary laws. An example is the ability of the tobacco industry to preempt many lawsuits by complying with the warning requirements of a 1969 federal statute.12 If the federal statute did not exist, the tobacco industry would have been under greater pressure to regulate itself, and would have faced greater liability under evolving state statute and tort law. For privacy advocates, the tobacco story can serve as a warning against a too-ready conclusion that some mandatory regulation is better than none. At a minimum, such advocates should consider the effect that passage of mandatory regulation will have on how the field of law would otherwise develop.

In the alternative, consider if the forces favoring regulation dominate politically. Although some observers might find this possibility remote, the debates about regulatory reform show a wide range of parties who claim that the costs of regulations often exceed their benefits. One way such regulations might be passed is by a coalition of regulatory advocates and government officials (legislators and regulators) who do not themselves incur the costs of complying with the regulation.13 Another possibility is that some companies or industries might succeed in pressing for regulations that impose costs on their competitors. A third possibility is that the government agency may systematically over-estimate the benefits of regulation, whether out of sincere mistake or a less honorable desire to increase the agency's turf.

Without seeking to take a general position on whether there is under-regulation or over-regulation, this discussion of possible public choice problems identifies a series of possible governmental failures. To the extent these government failures affect the nature of privacy regulation, there will be greater reason to seek non-governmental approaches for guarding privacy.
 

DEFINING "SELF-REGULATION:" LEGISLATION, ENFORCEMENT, ADJUDICATION

The pure market and pure enforcement models make no mention of self-regulation, and need not rely on self-regulation in order to reach the desired privacy protection. Examination of market failures and government failures, however, show that pure models bear little resemblance to reality. Because both market and government efforts to protect privacy are subject to significant limitations, the question arises whether a different approach, such as self-regulation, might create the reasonable protection of privacy without excessive cost.

Before further examining the rationales for self-regulation, we must first be more specific about the meaning of the term "self-regulation." Self-regulation, like government regulation, can occur in the three traditional components of the separation of powers: legislation, enforcement, and adjudication. Legislation refers to the question of who should define appropriate rules for protecting privacy. Enforcement refers to the question of who should initiate enforcement actions. Adjudication refers to the question of who should decide whether a company has violated the privacy rules.

An industry-organized process can "regulate" at one or more of the three stages. Probably the greatest amount of self-regulation occurs at the legislative stage. Industry groups often create and issue codes on privacy and many other topics. The Direct Marketing Association and Consumer Bankers Association, among many others, have issued guidelines for good privacy practices. These guidelines often provide for no legal enforcement, but instead are simply made available to industry members, government agencies, and the general public. In other instances, industry-drafted rules are enforceable. For example, building codes adopted by local and state governments routinely incorporate technical industry standards by reference--a violation of the "self-regulatory" code is itself a violation of law.

Enforcement and adjudication can also be undertaken by industry organizations. Prominent examples include state bar associations, medical boards, and the National Association of Securities Dealers. These organizations can typically both bring enforcement actions against their members and judge that professionals should be fined or stripped of their license to practice. In situations such as these, government regulation and self-regulation can be mixed together in almost endlessly complex ways. For instance, the rules that govern a lawyer's conduct may be a mixture of government-defined law (statutes) and self-regulatory law (bar association rules). Enforcement might be by an individual complainant, the bar association itself, or a government prosecutor. Adjudication might be by the organization itself, members of the profession officially appointed to a state board, or state agency personnel. Even when adjudication initially includes the self-regulatory organization, there may be an appeal to a government agency or to the courts.

These examples of "self-regulation" should make the basic point clear: Industry can be involved at one or any number of points in the process of legislating, enforcing, or adjudicating the rules. In the privacy context, one can imagine the Internet Commerce Association in the multiple roles of defining privacy rules, taking enforcement action against those who violate the rules, or deciding that a member has violated industry standards. In the latter instance, for example, the member might no longer be permitted to use the "ICA Seal of Good Privacy Practices." One should not speak too freely about the advantages or disadvantages of "self-regulation" generally. Instead, one should see whether and under what conditions industry has a particular, positive role to play at each stage of creating and enforcing the applicable regime.
 

THE CASE FOR WHY SELF-REGULATION MAY IMPROVE ON MARKET OR GOVERNMENT APPROACHES

Now that we have defined self-regulation, we are in a position to explore why it might be better than pure market or government approaches to the protection of personal information. First, self-regulation may provide benefits to society compared with an otherwise-unregulated market. Self-regulation can build on the collective expertise of industry. An industry might help instill ethics in members of the industry about the importance of protecting personal information, and community norms might reduce the amount that privacy is invaded. Members of an industry acting together might also be able to supply collective goods that they would not be able to supply acting alone. For instance, self-regulation might promote the reputation of the industry as a whole, and it might facilitate the creation of technical standards that will benefit the industry itself and society more generally. In addition, self-regulation may be better than a pure government solution. The same factors that can make self-regulation better than the market may also make it better than government. Self-regulation may also be adopted in order to stave off mandatory government regulation, and may thereby gain some of the good attributes of both government regulation and industry participation.
 

Reasons Why Self-Regulation May Benefit Society Compared with the Market

To explore these possible benefits, we will first build the case for self-regulation, and then explore reasons that might make the case less persuasive. The argument for industry expertise is intuitive and straightforward. Members of the industry have a great deal of knowledge about how customer information is used and sold. In assessing the cost-effectiveness of privacy practices, industry will have special insights about the costs of complying with rules. Industry will also understand the rules' effectiveness in preventing the dissemination of customer information. If any sort of regulation is indicated, then accurate information from the industry will be vital to making the rules as cost-effective as possible.

A different argument for self-regulation focuses on the role of an industry or profession in creating and enforcing norms of behavior.14 These norms are not legally enforceable, but may be taught or absorbed as part of professional training. The ICA, for instance, might require companies to have their personnel trained in the ICA privacy guidelines.15 Once a person enters an industry or profession, the norms can be enforced both internally and externally. The internal enforcement takes shape in what we call a person's ethics, scruples, or just plain unwillingness to do certain things. There will be situations where a person or firm can profit from disclosing client information, but scruples about privacy prevent the disclosure from occurring. The nature and empirical effect of these scruples are difficult to determine; the stronger the societal norms against disclosure, however, the more likely that companies will at least sometimes protect privacy rather than maximizing profits.16 The external enforcement occurs when members of a community monitor and discipline those who violate the community norms. An every-day example is when a group of people refuse to speak with someone because he or she is a gossip; i.e., the gossip is disciplined for disclosing private information. For the ICA, a company that violates privacy norms may find itself punished in a variety of informal ways, such as by having company personnel shunned at conferences. Once again, the empirical effect of community norms may be difficult to determine, but in theory strong norms can be an effective complement to market discipline and government enforcement.

Members of the industry might engage in self-regulation on a disinterested basis--they may wish to get the rules right, or may have ethical beliefs that certain sorts of private information should not be disclosed. Members of the industry may also find it in their collective self-interest to promulgate and enforce regulations. An important example is where self-regulation can enhance the overall reputation of the industry. Consider how this reputational issue might arise for the new Internet Commerce Association. Consumers will have concerns that Internet commerce will not be secure (i.e., hackers will steal their credit card numbers) and private (i.e., merchants will disseminate personal information widely). In order to allay these concerns, members of the ICA may find it useful to promulgate a Code for Internet Commerce. The ICA might educate consumers about the Code, and individual members could let purchasers know that they adhere to the Code. The ICA might even expel members that violated the Code, or sue companies in court for falsely claiming to adhere to it.

Notice how this hypothetical Code builds on the previous discussion. Drafting and enforcement of the Code relies on industry expertise. The Code might be enforced in part by individual ethics and community norms. And individual firms may find it highly profitable to pay dues to the ICA in order to subsidize a collective good--the Code enhances the overall industry reputation and reduces the risk that consumers otherwise perceive in doing business on the Internet.

Technical standards are another prominent example of a collective good that may be beneficial to both industry and society at large. A great number of standard-setting organizations foster self-regulation--the American National Standards Institute, the Institute of Electrical and Electronics Engineers, and many more.17 A key role of technical standards is to provide what economists call "network externalities."18 The most familiar example of a network externality is the telephone system--if everyone is hooked up to the same system, the value of telephones rises for everyone. When new people hook into the telephone network, the new members benefit from being part of the network. Additional benefits--external to the new members--are realized by existing members of the network, who can now communicate with a larger number of people.

The creation of technical standards can lower costs and increase competition in numerous ways.19 The case for such self-regulation is especially strong, however, where there are important network externalities. In such instances individual companies working alone cannot create the same amount of benefits to all users. For instance, in order to lower the cost of processing transactions, the Internet Commerce Association might develop a technical protocol for transmitting information among participating companies. No one company could similarly save costs by adopting the protocol--the benefits arise from the fact that many different companies adopt it. To take another example, the ICA might develop a standard form for consumers who wish to opt out of uses of their personal information. It might also act as a clearinghouse for forwarding the forms to all ICA members. Consumers could thereby express their privacy preferences once, and benefit from having those preferences recognized by the full network of ICA members.
 

Reasons Why Self-Regulation May Benefit Society Compared with Government Enforcement

Many of the points that make self-regulation potentially better than the market also make it potentially better than government enforcement. Industry expertise might not be given its full effect in a government-controlled system. Individual ethics and community norms might be more effective when arising from the community itself than when mandated by government agencies. Poorly-considered government rules might also interfere with the ability of industry to create collective goods such as technical standards or a strong industry reputation. For instance, the ICA might not be able to implement certain technical standards, which would improve the industry reputation, if mandatory government rules prevent sensible and cost-effective standards from being adopted.

There is an additional, powerful reason that it might be in industry's interest to self-regulate--in order to stave off mandatory government regulation. Consider how members of the ICA might rationally prefer an unregulated market to a market with self-regulation. As discussed above, companies can profit from using and selling personal information in an unregulated market, in large part because customers have difficulty in monitoring which companies have bad information practices. Members of the ICA might thus prefer no regulation to self-regulation, at least until a credible threat of government regulation arises. At that point, the calculus for industry changes. Adopting self-regulation will tend to reduce the likelihood of government regulation. The expected cost to the industry of self-regulation may thus be lower than the expected cost of complying with government regulation.

Industry is often quite explicit that the threat of government regulation is what spurs the adoption of self-regulation.20 If one is an optimist, it is possible to believe that this sort of self-regulation is the best possible solution. The self-regulation can draw on industry expertise and on the legitimacy of community-based norms. We might expect the self-regulation to be strict about protecting privacy, on the theory that only a reasonably strict rule will persuade government not to step in. We can thus hope for the advantages of self-regulation and of strict government regulation, but without some of the disadvantages of government regulation, such as inflexible rules and costly, formal enforcement processes.
 

THE LIMITS OF SELF-REGULATION:
CARTELS AND CRITIQUING THE BENEFITS OF SELF-REGULATION

We have now seen the case for how self-regulation may be better than the market because of industry expertise, community norms, and the provision of collective goods such as industry reputation and technical standards. Self-regulation may be better than government regulation for the same reasons, and also because of the possibility that the threat of government regulation will produce effective self-regulation at lower cost than a mandatory government regime.

In making the case for self-regulation, the emphasis was on situations where self-regulation would benefit the industry as a whole, such as by enhancing the industry's reputation or establishing technical standards that would profit the industry. An implicit assumption was that persons outside of the industry would not be significantly harmed by the industry's efforts. Now we shall relax that assumption, and examine the principal ways in which industry regulation may benefit the industry but harm outsiders. The traditional concern about self-regulation has been that the industry would harm outsiders by creating a cartel or otherwise exercising market power. In the privacy setting, an additional important concern is that self-regulation might be designed by industry for its own benefit, but that the privacy concerns of customers will not be effectively considered within the industry process. The discussion here will briefly examine the antitrust issues, and then critique each of the reasons given so far for why self-regulation should be the preferred institutional approach.
 

Cartels and the Possibility that Self-Regulation Will Be Used to Wield Market Power

Other papers in this NTIA report address the connection between antitrust law and self-regulation, and the comments here on the topic will be relatively brief. A first observation is that it is easy to see how self-regulation can lead to the risk of cartels--a cartel agreement, after all, is precisely an agreement by members of an industry to regulate their own sales. According to standard economic theory, cartels tend to increase industry profits by raising prices. Cartels are difficult to administer, however. Members are tempted to cheat to gain market share, such as by secretly lowering the price or raising the quality of the goods sold. In order to help cartel members police each other, cartels work best with standardized products at clearly-stated prices. Cartels thus do more than raise price. They also tend to stifle innovation and reduce the range of quality and choice available to customers.

The asserted benefits of self-regulation in any setting, therefore, must be weighed against the risk that industry members are acting together to exercise market power. The extent of the risk will depend heavily on the structure of the underlying market. At one extreme are cases where the antitrust risks are low, such as where there are low barriers to entry and the self-regulation does not increase barriers to entry. If starting a business on the Internet, for instance, primarily involves the low cost of writing a Web page, then rules of the Internet Commerce Association are unlikely to have major antitrust implications. At the other extreme are cases where self-regulation moves a market from competition toward monopoly--the regulation might reduce competition among members of the industry association, and also block entry by new competitors. An example might be a rule that somehow prevented sellers from using the Internet unless they agreed to join the cartel. In such an instance, the benefits of self-regulation would seem more doubtful when weighed against the likelihood of higher prices and lower quality for consumers.

The earlier discussion of market failures focused on the inability of customers to detect abuses of private information. Where customers cannot easily monitor privacy practices, a company's reputation does not suffer fully for bad data protection practices, and the company has an incentive to over-use private information. The existence of monopoly power provides an additional way that the market will not discipline a company's use of private information. Even if customers know that the monopoly has bad information practices, they may have no ready way to avoid doing business with the monopoly. The traditional policy response to the existence of such monopolies has been either to seek to end the monopoly or else to regulate it as a public utility. How to regulate the use of private information by utilities is, itself, a complicated inquiry within antitrust law. For purposes of this paper, the important point is that the existence of monopoly power can be the sort of market failure that can justify government regulation of the use of private information.
 

Critiquing the Asserted Benefits of Self-Regulation

The next task is to scrutinize the arguments that have been put forward to justify self-regulation: industry expertise; community norms and ethical values; enhancing industry reputation; technical standards; and self-regulation as an alternative to threatened government regulation. The discussion here will seek to highlight the analytical and empirical issues that will be important to determining the role of markets, self-regulation, and government regulation.

Industry Expertise. There is wide consensus that industry expertise should be brought to bear in designing rules for protecting personal information. As with other regulatory issues, industry will have unique access to information about the underlying technology and market conditions, and about the costs of complying with alternative regimes.

It is less clear, however, that our belief in industry expertise also means that we should favor self-regulation over market or government approaches. In a market approach, each company has the usual incentive to apply its expertise in order to maximize profits. All of the company's efforts to use its expertise will ordinarily inure to the profit of that company itself. By contrast, it will only sometimes be in the self-interest of a company to employ its expertise as part of an industry-wide effort to develop self-regulation. The industry-wide regulation will be a collective good to the industry. The individual companies will have the usual incentives to free-ride and let other companies suffer the expense of organizing the effort. Companies engaged in the process may also suffer by letting competitors learn about their business operations, or by undergoing special scrutiny of their privacy practices. In short, a member of the ICA might rationally "lie low" and fail to share its expertise, especially if it wished to continue profiting from the use of personal information.

In comparison to the market, then, the case for self-regulation will depend on there being an explanation of why the expertise is provided, and how that expertise will take shape in the form of well-drafted and effective self-regulation. In comparison to government regulation, the case for self-regulation must take account of the ways industry expertise is mobilized in the government setting. Industry representatives are deeply involved in the process of drafting statutes and regulations. As a formal matter, industry representatives are almost always included as witnesses at legislative hearings and as sources of information for agency efforts such as this Report by the NTIA. Under the Administrative Procedure Act, interested parties have the right to comment on proposed rulemakings, and the agency is required to respond to those comments. On a less formal level, industry expertise is made available to government in a wide range of lobbying and educational contexts.

It is no simple task to compare how well industry expertise is included in self-regulation and government regulation. The case for self-regulation will stress how industry might be more forthcoming to an industry group than to a formal government process. Discussing industry issues with the government often means disclosing that information to the world, in light of the requirements of the Freedom of Information Act, the Federal Advisory Committee Act, and other government-in-the-sunshine laws. The formality and publicity of sharing information with government thus might favor a self-regulatory approach. On the other hand, an advantage of government regulation is that it systematically takes account of the views of those outside of the industry. An obvious worry about self-regulation is that the rules will be drafted to favor industry, such as by allowing greater industry use of personal information than a more inclusive process would have permitted. The effect on other parties highlights the possibility that those outside of the industry will have relevant expertise.

Community norms and ethical values. The next argument for self-regulation focuses on the role of an industry or profession in creating and enforcing norms of behavior. The idea is that individuals may feel ethical constraints against misusing customers' personal information. In addition, those who do disclose such information may be subject to non-legal sanctions from the community. This sort of self-regulation naturally complements a market approach. Individuals and companies in the industry will protect their reputation, not only in the eyes of consumers (the market approach), but also in the eyes of their own professional community (the self-regulatory approach). Compared to government regulation, it is plausible that self-regulation will do a better job of inducing voluntary compliance with norms--a sense of honor or ethical pride in adhering to high standards might be diluted if enforcement is done through bureaucratic rules and procedures.

That said, there is serious doubt about how well community norms will protect personal information in the modern settings relevant to protecting personal information. First, our usual intuition is that informal norms work most effectively in small groups. In these settings, the members interact with each other repeatedly, information about disreputable acts spreads widely, and each person has reason to care about his or her reputation with each of the others. By contrast, the modern issues about protecting personal information tend to occur in nationwide or even global settings. If an individual or company acts in a disreputable way and profits from the sale of personal information, it is quite possible that no one outside of the companies using the information will know of the act. Even if some other persons learn of the distasteful act, those persons might be geographically distant or otherwise outside of the social circles that would express outrage upon learning of the act.

A related reason to doubt the effectiveness of norms is that many decisions about uses of personal information are done as a matter of corporate policy rather than individual decision. An individual professional might decide to accept lower profits for the sake of upholding ethical principles. That ethical decision might be bolstered by the individual's awareness that his or her personal reputation would be on the line if any unethical behavior became known. By contrast, a similarly ethical person acting within a corporation might be required to justify a policy in terms of how it will increase the company's profits. That person would also know that blame for the bad act would fall on the company as a whole, rather than on him or her personally. When decisions about the protection of personal information are diffused widely across a large corporation, it seems unlikely that community norms will be a powerful constraint on the company's incentive to maximize profits.

Enhancing Industry Reputation. We next turn to the argument that the industry might promulgate and enforce regulations in order to enhance the overall reputation of the industry. In the discussion above, we considered how the ICA might create a Code for Internet Commerce in order to allay customer concerns about security and privacy. The idea is that it will be in the interest of individual ICA members to comply with this Code. This self-interest will exist precisely when the profits from the improved industry reputation outweigh the losses from the company not being able to use personal information. A familiar example might be the history of banks in Switzerland (or other countries), where all members of the industry benefited from a strong reputation for keeping bank records private.21

The chief task with respect to the industry reputation argument is to specify the conditions under which the industry would actually provide the collective good. A first thing to notice is how much maintaining the industry reputation for protecting privacy resembles the task of maintaining a company's reputation for protecting privacy. A concern in both instances is that the market does an imperfect job of policing the reputations--it is difficult for consumers to detect when a company or an industry has misused personal information, and so the companies and industry have incentives to over-use that information.

The incentive for industry to create the collective good is especially great when customers can tell that someone in the industry has misused personal information, but cannot tell which company in the industry has done so. For instance, one might imagine a circumstance in which a customer could tell that some problem has arisen in connection with an Internet purchase, perhaps because the personal information was linked to that person's e-mail information. The customer does not know, however, which Internet company misused the information. In such a case, the customer might become less willing to use the Internet generally for purchases. Members of the Internet Commerce Association would then have a collective interest in enhancing the reputation of Internet purchasing, and might act together as an industry to promulgate an effective Code for Internet Commerce.

A different way to create the collective good is where the reputation of a dominant company or a small set of companies overlaps substantially with the reputation of the entire industry. In such a case, the leading company or companies may find it in their self-interest to lead the way to an industry-wide Code of privacy practices.22 This "leading company" scenario may help in protecting privacy, if the result of promulgation of the Code is to spread better data protection practices more widely in industry.23 The Code might help reduce the likelihood of companies seeking competitive advantage by cutting corners on data protection policies.

In general, it would seem that such efforts to enhance the industry's reputation for privacy would be a helpful, although perhaps modest, supplement to market competition. The main objections to the argument are not that enhancing industry reputation is a bad thing. The main concern instead is that the collective good simply will not be created that often--as explained here, industry members will only promulgate a Code and enforce it under fairly restrictive conditions. In addition, an industry member might still find it in its self-interest to break a privacy rule, when the loss of reputation is spread across the entire industry.

Technical standards. As discussed above, a prominent sort of self-regulation is a different sort of collective good, the creation of industry technical standards. Such standards might provide a variety of benefits compared to a market lacking such standards. One can imagine the ICA developing a standard electronic form, for instance, that would lower the costs to members of sharing personal information. The same form might also provide an inexpensive way to let customers opt out of having their information shared.

Intricate antitrust issues can arise about when the benefits of standard-setting procedures are outweighed by possible antitrust problems. In the Internet context, Professor Mark Lemley has recently argued that joint standard-setting activity raises the most acute antitrust risks in two settings: (1) where the standards are "closed" rather than "open;" i.e., where access to the standards is limited to members of the organization; and (2) where a particular participant "captures" the standard-setting process and uses the process to its competitive advantage.24 An example of the latter is if the standard requires use of intellectual property owned by one participant. In the privacy context, it is not immediately apparent that either of these situations is likely to occur. If not, then the antitrust concerns about standard-setting are not likely to a prominent argument against self-regulation.

A more pressing privacy problem is likely to result from the relatively small role that customers and others outside of industry often play in the creation of industry standards. For many technical standards, where negative effects on outsiders are small, the standards should indeed be drafted by the industry experts who are most affected by the rule. For instance, if the ICA creates standard forms that simply reduce the cost of doing business, then it seems unlikely that the government could do a better job. In other instances, however, effects on outsiders may be substantial. Imagine, for instance, if the ICA standards made it much easier for merchants to discover highly sensitive personal information, such as by opening up previously-inaccessible databases. This ICA regime might create profits for industry, but at a substantial privacy cost to customers.

Where the burden on outsiders is substantial, then the argument for government regulation becomes stronger. The case for government regulation will be stronger to the extent that the government rules are more rigorously enforced and better incorporate the interests of those outside of industry. Any such benefits of government regulation will be weighed against the usual costs of government intervention, including the possible inflexibility of government rules and the likely higher administrative and compliance costs.

Self-Regulation as an Alternative to Threatened Government Regulation. The last argument for self-regulation is that it might be desirable in order to stave off the threat of mandatory government regulation. In order to forestall government regulation, the self-regulation may need to be fairly strict. If the self-regulatory rules are indeed strict, then it is possible that the protection of privacy would be comparable under either self-regulation or government regulation. At the same time, a self-regulatory approach might be able to avoid some of the substantial costs of having a formal government regime.

On the other hand, there are grounds for believing that this sort of self-regulation will be less protective of personal information than government regulation would be. First, there is the question of how non-binding enforcement of industry codes compares with legally-binding enforcement of government rules.25 Second, we again face the general question of how the concerns of persons outside of industry, such as consumers, will be included within the industry regulation. If self-regulation is indeed more flexible, it may be more flexible for industry than for others. Third, this sort of self-regulation is premised on the existence of a credible threat of government regulation. Self-regulation is more likely to be adopted when the legislative or executive branches are very concerned about privacy issues. Over time, however, the legislative threat might ease.26 Agency attention may be directed elsewhere. As the threat of government action subsides, we might expect that self-regulatory efforts would also become more lax. After all, by hypothesis, the industry is spurred to regulate itself because of the threat of government regulation. Unless someone outside of the industry has the ongoing ability to enforce for privacy lapses, whether by market action or legal enforcement action, then we should expect the effectiveness of self-regulation to be uneven over time.

In conclusion, there are significant reasons to believe that government regulation will be stricter in enforcing the protection of personal information than this sort of self-regulation. The difficult question will be to balance these gains in privacy protection against the likely higher administrative and compliance costs of government regulation.
 

CONCLUSION

Economists sometimes warn against the "Nirvana fallacy"--against the idea that there is some perfect institutional arrangement that will solve all problems. Markets, self-regulation, and government each have potential strengths for protecting privacy and achieving other social goals. One task here has been to identify the ways that each might do so. The pure market model shows how a company might effectively protect privacy in order to enhance its reputation and sales. The pure enforcement model shows how government rules might deter improper disclosure of personal information. The discussion of self-regulation shows how that approach may protect privacy by drawing on industry expertise, community norms, and the ability of industry to provide collective goods such as technical standards and an enhanced industry reputation.

Markets, self-regulation, and government inevitably also have their own limitations in the protection of privacy. A chief failure of the market approach is that customers find it costly or impossible to monitor how companies use personal information. When consumers cannot monitor effectively, companies have an incentive to over-use personal information: the companies get the full benefit of the use (in terms of their own marketing or the fee they receive from third parties), but do not suffer for the costs of disclosure (the privacy loss to consumers). Government regulation is subject to the well-known possible failures of rigid, costly, and/or ineffective rules. Self-regulation is subject to the possibility that the industry is using the self-regulation for cartel purposes. The claimed advantages of industry expertise, community norms, and collective goods may also, on inspection, be less substantial than advocates of self-regulation would hope.

Even when Nirvana cannot be achieved, we must do the best we can with the available, imperfect institutions. As mentioned in the introduction, the issue of how to protect personal information arises in a large and rapidly-growing number of settings. A chief goal of this paper has been to supply an analytic framework for examining the role of markets, self-regulation, and government in the protection of personal information. An important benefit of this framework is that it supplies a list of empirical questions that will be helpful in choosing among the alternative institutional approaches.

Based on the analytic framework developed in this paper, the following empirical questions provide a useful checklist for choosing institutions to help protect personal information in a given setting:
 

Key Questions about a Market Approach

How difficult is it for consumers to discover companies' policies for use of private information and monitor the companies' compliance with those policies? How much do such difficulties lead to over-use of private information by companies?

How difficult is it for customers who wish to do so to bargain with companies for different privacy practices?



Key Questions about a Government Approach

How great are government's administrative costs and industry's compliance costs under a mandatory government regime?

How do the costs of drafting, enforcing, and adjudicating a government privacy regime compare to those costs in the private sector?

What sort of public choice or other political problems would we expect in the government process?

What are the key benefits of a government approach, which notably may include stricter enforcement of privacy rules and greater concern for the interests of those not in the industry?



Key Questions about a Self-Regulatory Approach
 

Monopoly Power

Do the self-regulatory processes offer significant opportunities to create cartels or otherwise enhance market power?

To what extent do sellers already have monopoly power, so that a bad reputation concerning use of personal information will not reduce their profits?



Industry Expertise

To what extent will self-regulation result in the use of industry expertise more than would occur in an unregulated market?

How do the incentives of industry to provide expertise compare for self-regulatory and government efforts? How significant are the disincentives to disclose information to the government, such as from government-in-the-sunshine laws?

How likely is there to be important expertise from outside of industry? How well will that expertise be incorporated into either self-regulatory or government efforts?



Community Norms and Ethical Values

Can we identify ways in which companies or the industry will instill ethics or enforce community norms against excessive disclosure of personal information? Will compliance with norms be greater in some way than would be compliance with legally enforceable rules?

Can we identify a small enough community or a direct enough effect on individuals' reputations that we can expect the ethical rules or community norms to substantially constrain the incentive of companies to maximize profits?



Enhancing Industry Reputation for Protecting Privacy

What incentives will the industry have to enhance its reputation beyond the incentives that companies have in an unregulated market?

We will expect such incentives to be strongest where: (a) customers can tell that someone in the industry has misused personal information, but cannot tell which company in the industry has done so; or (b) the reputation of a dominant company or a small set of companies overlaps substantially with the reputation of an entire industry.



Technical Standards

How much are network externalities or other benefits realized through industry standard-setting processes in the privacy realm?

Do antitrust problems argue that a governmental process would be preferable to an industry process?

How well are the concerns of those outside of industry, including consumers, included within the industry standard-setting process? How much better, if at all, are such concerns incorporated into a government process?

What other costs would the governmental process have that would be less in the industry standard-setting process?

Self-regulation and the Threat of Government Regulation

If self-regulation does not stave off government regulation, what sort of additional costs would arise from government-mandated rules, such as greater inflexibility and other administrative and compliance costs?

How do these costs of government regulation compare to any benefits in improved protection of personal information? How likely is there to continue to be a credible threat of government regulation, in order to keep self-regulation effective? How well are the interests of those outside of the industry protected in self-regulation compared with government regulation?

In conclusion, the empirical magnitude of these various costs and benefits will vary considerably across industries. The best mix of markets, self-regulation, and government regulation will often vary for the distinct stages of defining, enforcing, and adjudicating the rules for protecting personal information. At each stage, we can examine how self-regulation may be better or worse than a more fully market or government approach.

At heart, the attraction of self-regulation is that the industry generally has the greatest expertise and the most at stake in the regulatory process. We might readily imagine that a measure of industry cooperation and self-regulation will protect private information more fully than would a pure market approach. The corresponding worry about self-regulation is that it may harm those outside of the industry--those who are not part of the "self." Where the likely harm to those outside of industry is greatest, the argument for government regulation becomes stronger.

________________________________

ENDNOTES

1 A recent NTIA study concluded: "Uniform privacy requirements will further benefit the private sector by eliminating a potential source of competitive advantage or disadvantage among rival providers of telecommunications and information services. At the same time, NTIA's recommended approach gives private firms considerable flexibility to discharge their privacy obligations in a way that minimizes costs to the firms and to society. For all of these reasons, NTIA believes that both consumers and the private sector will benefit substantially from voluntary implementation of that approach. If, however, industry self- regulation does not produce adequate notice and customer consent procedures, government action will be needed to safeguard the legitimate privacy interests of American consumers." NTIA, Privacy and the NII: Safeguarding Telecommunications-Related Personal Information, www.ntia.doc.gov/ntiahome/ privwhit epaper.html.

2 For a somewhat similar discussion of market and government enforcement systems, see David Charny, Nonlegal Sanctions in Commercial Relationships, 104 Harv. L. Rev. 375, 397-403 (1991).

3 "Self-regulation" of government's use of data is handled by separate law. In the United States, the Privacy Act and the Freedom of Information Act are the primary "self-regulation" for how the federal government treats personal data.

4 I am currently at work on a longer article tentatively entitled "Cyberbanking and Privacy: The Contracts Model."

5 A full description of the human rights and contracts approaches must be left to a different paper. For present purposes, it is not necessary to choose between the two approaches, which differ somewhat as to the overall goals of privacy protection. The focus here is on which institutional arrangements, including self-regulation, will tend to achieve those goals, however defined.

6 An exception would be if the person involved in the bargaining gained some other sort of benefit from his or her effort. For instance, the person might be an employee of a citizen's group devoted to privacy issues. The individual and the group might gain in various ways, including professional satisfaction and favorable publicity, by reaching agreement with a major company. While acknowledging the substantial effects that citizen groups often have, there remains a strong suspicion in the academic literature that public goods, such as bargaining for effective privacy protection, will be provided less than people's actual preferences would warrant. For the classic treatment, see Mancur Olson, The Logic Of Collective Action (1965); see also Peter P. Swire, The Race to Laxity and the Race to Undesirability: Explaining Failures in Competition Among Jurisdictions in Environmental Law, Yale Journal on Regulation/Yale Law and Policy Review, Symposium: Constructing a New Federalism, at 67, 98-105 (1996) (discussing likely underprovision of public goods).

7 There can obviously be endless debate about what constitutes the "public good" and whether the term even has any coherent meaning. The point for now is that the government personnel are sincerely seeking what they believe to be the best policy, rather than being governed by motives such as personal corruption, interest-group politics, or desires for increased agency turf.

8 The discussion here focuses on the efficiency of the rule, rather than its distributional effects. The question of who actually pays for the cost of regulation is often extremely difficult to answer, and depends on empirical issues such as the existence of close substitutes or complements for the product, and on the ability of the industry to pass on added costs to its customers. ICA members, for instance, might or might not be able to charge more for their products if a burdensome privacy rule were imposed. If their purchasers readily switched to mail-order, the ICA members and their stockholders might suffer a loss. If purchasers instead were mostly choosing among ICA members, then the purchasers would be more likely to absorb the higher prices.

9 For one discussion of the issue, see Louis Kaplow, Rules versus Standards: An Economic Analysis, 42 Duke L.J. 557 (1992).

10 In the area of information privacy, a good example of slowness-to-amend may be the longstanding controversy about how to update the 1974 Freedom of Information Act to take account of computerized records. Important such amendments were included in the Electronic Freedom of Information Amendments Act of 1996.

11 For two general introductions to public choice theory, see Daniel A. Farber & Philip P. Frickey, Law and Public Choice: A Critical Introduction (1991), and Dennis Mueller, Public Choice II (1989).

12 Cipollone v. Liggett Group, Inc., 505 U.S. 504 (1992) (federal statute preempts state laws requiring additional warnings, as well as state failure-to-warn and fraudulent misrepresentation claims).

13 For one academic treatment of this sort of possible over-regulation, see Henry Butler & Jonathan Macey, Externalities and the Matching Principle: The Case for Reallocating Environmental Regulatory Authority, in Yale Journal on Regulation/Yale Law and Policy Review, Symposium: Constructing a New Federalism, at 23 (1996).

14 For extensive discussion of the role of norms in supplementing markets and legal rules, see Symposium, Law, Economics, and Norms, 144 U. Pa. L. Rev. 1643-2339 (1996).

15 Current examples of such ethical training include law students, who are required to study the rules of professional responsibility, including the ban on disclosing a client's secrets. Similarly, bankers are trained in a distinct culture that has generally frowned on disclosing client financial information.

16 For an analogous argument about the importance of norms and ethics in environmental law, see Carol M. Rose, Rethinking Environmental Controls: Management Strategies for Common Resources, 1991 Duke L.J. 1.

17 Web links to many of these organizations are provided by the National Standards Systems Network, at www.nssn.org.

18 For a clear discussion of the role of network externalities and other factors favoring promotion of standardization on the Internet, see Mark A. Lemley, Antitrust and the Internet Standardization Problem, 28 Conn. L. Rev. 1041, 1043-54 (1996).

19 According to ANSI: "Implementing standards can: Increase market access and acceptance; Reduce time and costs in product development; Attain a competitive advantage and faster time to market; Cut costs in component and materials acquisition; Reduce administrative and material expenses. Participating in standards development can: Help develop new markets and strengthen existing ones; Ensure foreign market access to your company technology or processes; Help you gain a competitive edge by influencing the content of domestic and international standards; Minimize your time to market, strengthen your market presence, and allow you to realize new revenue through the licensing of technology on reasonable terms." See www.ansi.org/broch1.html.

20 A clear example comes from the recent announcement by the Consumer Bankers Association of their new privacy guidelines. The trade press report on the guidelines stated: "The Consumer Bankers issued the privacy guidelines to show the federal government that the banking industry is policing itself and no new regulations are needed." Barbara A. Rehm, "Bank Group Issues Guidelines for Protecting Consumer Privacy," Am. Banker, Nov. 22, 1996.

21 In at least some countries whose banks have a reputation for secrecy, the industry efforts to keep records secret are bolstered by laws that prohibit disclosure of information.

22 In particular, the self-interest of leading companies can explain how the self-regulatory efforts of industry might be funded. The expected value of the Code to the company might be great enough to reduce any incentive to free ride on the efforts of other companies. The leading companies may also benefit by tinkering with the Code so that, at the margins, it provides a good fit for their own privacy practices.

23 The "leading company" creation of the Code might also be an anti-competitive effort to raise rivals' costs or increase barriers to entry to the industry. In the privacy setting, however, the risk of net harm to consumers does not seem especially great. The harm to consumers would result only if a specific sort of supplier stopped competing--those suppliers who can survive in the market only by using more personal information than self-regulation would allow.

24 Mark A. Lemley, Antitrust and the Internet Standardization Problem, 28 Conn. L. Rev. 1041, 1083-88 (1996).

25 It is possible that self-regulation will be more protective of privacy than government regulation, such as when expertise is better applied in industry regulation, or when ethical beliefs and community norms work better under an industry system than a government system. I am inclined to be cautious about such an optimistic view of the effectiveness of self-regulation. For a highly critical assessment of the effectiveness of self-regulation by the Direct Marketing Association, see Paul M. Schwartz & Joel R. Reidenberg, Data Privacy Law: A Study of United States Data Protection 307-48 (1996). As discussed in the text, a more likely scenario is that government regulation will result in stricter protection of personal privacy, but will also impose higher administrative and compliance costs.

26 In a well-known article, economist Anthony Downs discussed the "issue-attention cycle," in which issues predictably would rise and fall in the level of attention they received in the legislature and the general public. Anthony Downs, Up and Down with Ecology: The Issue Attention Cycle, 28 Pub. Interest 38 (1972).

 


Privacy and Self-Regulation: Markets for Electronic Privacy
 

Eli M. Noam(2)
Professor of Finance and Economics
Director, Columbia Institute of Tele-information
tel: (212) 854-4596
fax: (212)932-7816
e-mail: enoam@research.gsb.columbia.edu
or www.ctr.columbia.edu/citi/


 

INTRODUCTION
 

For a long time, the conventional wisdom was that electronic communications constituted a major threat to individual privacy. Wiretapping, eavesdropping, and data banks were part of the Big Brother and Nosy Sister scenario. This fear for personal privacy is justified in the short term. But in the long term, the opposite is more likely to happen, because the electronic tools that permit privacy invasion are even more powerful in controlling an individual's informational autonomy. In the process, still another revolution is upon us, the revolution of access control. By gaining such control individuals achieve bargaining strength over those who seek information about them. They can establish a perimeter over the inflow and outflow of information. They can create property rights in personal information. Transactions become possible, and markets in private information can emerge.

No problem is ever new. Jeopardies to privacy have been associated with electronic media from the beginning. Gossipy manual operators,1 party lines with participatory neighbors,2 and the absence of a warrant requirement for wiretapping3 all created privacy problems.4 The first American patent for a voice scrambling device was issued only five years after the invention of the telephone.

The New York Police Department, always on the technology frontier, listened in on telephones since at least 1895. In 1916 this led to a public controversy about eavesdropping on a Catholic priest as well as on a law firm involved with competitors to J.P. Morgan & Co. For World War I munitions contracts.5

Today, a new generation of electronic privacy problems has emerged, for several reasons:

  • An increasing number of transactions are conducted electronically.6

     

  • It has become easier and cheaper to collect, store, access, match, and redistribute information about transactions and individuals.7
  • Wireless transmission conduits include unsecured portions.
  • The number of communications carriers and service providers has grown enormously, leading to an increasingly open network system in which information about use and user is exchanged as part of network interoperability.
  • The Internet computer network system is wide open.

In consequence, new electronic privacy problems keep emerging. Recent controversies include:

  • Intrusive telemarketing.
  • Data collection about transactions.
  • The ability of governments to control encryption.
  • The ability to determine an incoming caller's phone number and use of such information.
  • The monitoring of wireless mobile communications.
  • Employers' monitoring of their employees.
  • The ability of using e-cash for illegal transactions.
  • The difficulties of law enforcement agencies to keep up with transmission technology.
  • The unsecured nature of the Internet, and the ability to track the sites which an individual visits.

And more is coming our way. For example, tiny mobile communication transceivers, together with number portability, will enable telephone subscribers to be continuously connected. Their locational whereabouts, their comings and goings, and the identity of other persons in the same location could, therefore, be continuously ascertained.

Given that privacy is important to so many people, and given that information technology keeps raising new questions, what approach should be adopted to deal with privacy problems?

In the past, if remedies were considered, the primary strategy was to resort to regulation. The call for the state to control and protect privacy is a natural response especially in the field of electronic communications, given their history around the world as either a state-controlled telephone or broadcast monopoly or tightly regulated sector. This has led to a view of electronic privacy problems largely as an issue of rights versus the state or its regulated monopoly firms-- and to the question how to create such rights in the political, regulatory and legal sphere. But such a view is static: having a right is often believed to be the end of the story. Yet in most parts of society, the allocation of rights is only the beginning of a much more complex interaction.

Privacy is an interaction, in which the rights of different parties collide. A has a certain preference about the information he receives and lets out. B, on the other hand, may want to learn more about A, perhaps in order to protect herself. The controversies about caller-identification, or of AIDS disclosure by medical personnel, illustrate that privacy is an issue of control over information flows, with a much greater inherent complexity than a conventional "consumers versus business," or "citizens versus the state" analyses suggests. In this case, different parties have different preferences on "information permeability" and need a way to synchronize these preferences or be at tension with each other. This would suggest that interactive negotiation over privacy would have a place in establishing and protecting privacy.

While this article will not suggest that markets can provide a solution to every privacy issue, it will argue that they can be utilized much more than in the past.
 

WHAT IS PRIVACY?

In the information sector, privacy consists of two distinguishable but related aspects:8

The protection against intrusion by unwanted information. This is sometimes termed "the right to be left alone,"9 and it is an analogue to the constitutional protection to be secure in one's home against intrusion.

The ability to control information about oneself and one's activities; this is related in some ways to proprietary protection accorded to other forms of information through copyright laws,10 and security of information about oneself from tampering by others.

The common aspect of both these elements is that they establish a barrier to information flows between the individual and society at large. In the first case, it is a barrier against information inflows; in the second instance, against information outflows.

The concept of privacy is not without its detractors. Among the major criticisms are:

"Privacy protects anti-social behavior." In this view, privacy is a smoke-screen used to hide activities that should be discouraged. This may be true at times; yet it is also the price of personal freedom. Authoritarian or backward societies do not value a private sphere since they do not tend to respect individuality and subordinate it to the demands of rulers or societal groups.11 The recognition of a private sphere is hence one of the touch-stones of a civilized and free society.12

"Privacy is costly to the economy." Privacy protection raises the cost of an information search. For example, potential employers and buyers have to spend more effort (and money) to find out who they are dealing with if access to personal information is restricted. Deception becomes easier and transaction costs rise.

But there are economic arguments on the other side. Privacy affects the ability of companies and organizations to hold on to their trade secrets and details of their operations, and to protect themselves from leaks of insider information and against governmental intrusion. Information has value, and where it has no protection through property rights it must be protected through confidentiality or secrecy.13 To permit its easy breach14 would lead to a lesser production of such information.

The loss of privacy leads to inefficiency in information flows, just as excessive privacy protection may. One of the predictable results of third party monitoring of telephone calls is to force speakers to disguise or modify their communications in order to keep them secret.

Partly in response to economic and social needs, many transactions have been specifically accorded special common-law informational protection known as "privileges," e.g., between attorney-client, patient-doctor, citizen-census taker, penitent-clergy, etc. The idea in each case is that the protection of information leads to an economically and socially superior result even if it is inconvenient to others in an individual instance.

"There is no demand for Privacy." This objection views privacy as an issue of concern only to a small elite group. But to the contrary, attention to privacy is widely shared. For example, according to information from the New York Telephone Co., of a few years ago, 34% of all residential households in Manhattan and 24% of all its residential households in the State had unpublished telephone numbers at subscriber's request. Most policemen, doctors, or judges, to name but a few professions, have unlisted numbers. On the West Coast, the spread of unlisting is still further advanced, reaching 55% in California! It should be noted that it costs extra to be unlisted. In other words, a large number of customers is willing to pay in order to increase its privacy. With more than half of the population willing to do so, it becomes impossible to keep denying that privacy is an important issue.
 

POLICY APPROACHES

As the new technological options emerge they create new opportunities but also new privacy problems. How can such problems be dealt with?

As was mentioned, the primary policy response has been regulatory. Within that position there were two major directions--centralized general protection and decentralized ad-hoc protection. West European countries, in particular, have pursued the former, and passed comprehensive (omnibus) data protection laws and established institutionalized boards with fairly rigorous rules, and coordinated internationally on information collection and data flows.15 The United States, in contrast, has dealt with specific problems, one at a time, and with different approaches across the country.

In Europe, advances in data processing led in the 1970s to fears about the abuse of information storage and the potential for a "1984"-like surveillance state. Many of these fears were based on the technological notion of computers as vast centralized mainframes, a notion which corresponded to the state of computer technology of the 1960s. But since then, this technology has moved steadily toward a decentralized system, with millions of small computers in people's offices and homes.

Though the origin of concern over privacy was the potential violent abuse of data by government agencies, the focus of remedial action shifted quickly to data collection activities by private business. Rules against the government's collection of data were also set, but with less severity. At the same time that Germany promulgated the first data protection laws against private data abuse, its federal and state governments took a quantum leap in the use of data-processing technology for the surveillance of its citizenry. During the 1970s, a handful of terrorists prompted the German police to institute a chillingly efficient system of border checks, citizen registration, data access, and domestic road blocks, all of which were interconnected by data banks and communication links. Although the terrorism was quickly stopped, many control mechanisms were not.

Additionally, the rules had a tendency to spread. A loophole was soon recognized in privacy laws: international data transfers permitted the evasion of data protection laws. In Sweden, for example, a data file on any employee is subject to protection from disclosure to third persons. However, if a Swede works for a foreign firm, it would be possible that the data would be transmitted to the headquarters of the firm, where it would be less protected. Conceivably, therefore, some countries could set themselves up as "data havens" in order to attract businesses determined to circumvent privacy laws. Although these threats were more theoretical than real, they led to a movement to "harmonize" data protection practices or to restrict the flow of sensitive data in the absence of such harmonization.

The Organization for Economic Cooperation and Development (OECD) was instrumental. In 1979, the OECD drafted a first set of guidelines for its member states: Data collection should be limited to necessary information obtained lawfully, and, where appropriate, with consent; data should be accurate, complete, up-to-date, and relevant to the needs of the collector; use of the data ought to be specified at the time of collection, and its disclosure should be in conformity with the purpose of collection; assurances must be made against unauthorized access, use, and disclosure; and data should be open to inspection and correction by the individual to whom it refers.16

The Council of Europe incorporated the OECD guidelines in the 1980 Convention on the Protection of Individuals with Regard to Automatic Processing of Personal Data. The convention affected all transborder data flows among European countries and with other countries, such as the United States. This made American firms with international business activities nervous, since the convention provided that any country could restrict the transmission of data to another country that did not have data protection legislation comparable to its own. Since firms conducting international transactions generally prefer to have uniform procedures for transactions in various countries, procedures were likely to conform to the strictest of national rules.

In 1992, the European Commission adopted a directive establishing basic telecommunications privacy rights for its member states. The draft included restrictions on unsolicited calls, calling number identification, and use and storage of data collected by telephone carriers for electronic profiles.17 It mandates that holders of data pay for security measures in order to bar unauthorized access. It also prohibits the creation of electronic profiles of individuals utilizing data concerning their purchases or other actions, and it bars transfers of data to non-EC member countries unless those countries have adequate data protection rules.18

Among Third World countries, Brazil has been particularly active in data and telematics issues. Instituted during the years of military dictatorship, the thrust of Brazil's policy was evident in the statement of its top information officer, who combined both the civilian and military functions of that term.

The administration [i.e., the restriction] of TDF [transborder data flows] appears to be an effective government instrument for the creation of an environment that makes the emergence of an internationally viable national dat-service industry possible. By itself, such an industry would have had great difficulties in overcoming the obstacles of a completely "laissez-faire" environment. The country's TDF policy altered that situation.19

A license had to be obtained before establishing international data links. Applications for foreign processing, software import, and database access were rejected if domestic capability existed. The policy was strongly embraced by the Brazilian military dictatorship and its business and industry allies, and it was admired around the world as an assertion of national sovereignty by many observers who would otherwise feel no kindness toward right-wing juntas.

In the United States a generally more pragmatic approach to legislation, and a case oriented decision process administered through the judiciary and the regulatory agencies, have led to the tackling of specific data abuses when the became apparent rather than to comprehensive laws. This has led to a less systematic approach that in Europe, and to a variety of ad hoc federal and state legislation. Typically, they addressed a narrow and specific issue of concern.20 Most such statutes were either aimed at particular industries (for example, credit rating bureaus), or at the conduct of governmental agencies, or they dealt with flagrant abuse such as computer break-ins.21

Thus, contrary to often-held views in other countries, numerous laws protecting data and privacy exist in the United States, and some of them are quite far-reaching, especially in terms of access to state files, and limits on such files.

Nevertheless, U.S. privacy legislation remains considerably less strict than European law in the regulation of private databases, and coverage of U.S. governmental organizations by privacy law is not comprehensive. Although the Privacy Act of 1974 restricts collection and disclosure by the federal government, and vests some responsibility in the Office of Management and Budget, only a few states and local governments have passed similar fair information practices laws for their agencies. The U.S. has no government agency specifically charged with data protection similar to the centralized data protection commissions or authorities established in European countries, though proposals have been advanced in Congress.

A synthesis of the comprehensive European and the ad-hoc American approaches is to formulate a set of broad rules or principles applicable to a sector of the economy, or to a set of issues. This was the direction taken by the New York Public Service Commission on the issue of telecommunications privacy.

The New York Public Service Commission's approach in 1991 went well beyond the problem-specific approach. It issued, after a proceeding initiated by the author, a set of broad privacy principles applicable to the whole range of telecommunications services under its jurisdiction.22

A similar approach, that of privacy principles, was recently taken by the Federal Government's high visibility Information Infrastructure Task Force, in the report by its Privacy Working Group, which issued a set of Principles for Providing and Using Personal Information. But that report is virtually devoid of a discussion of a market mechanism in protecting privacy, or in integrating such mechanisms in its privacy principles.

MARKETS IN PRIVACY

The reflexive approaches to privacy problems has been regulation, or denial. Are there other options?

First, there is the possibility of self-regulation, where an industry agrees to restrict some of its practices. Realistically, though, self-regulation is rarely voluntary (unless serving an anti-competitive purpose): it usually occurs only under the threat of state regulation, and it can therefore be considered a variant of direct regulation.

The practice for the state to control and protect privacy is a natural response in the telecommunications field, given its history as state-controlled monopoly. It has led to a view of privacy problems largely as an issue of rights, and the question is how to create such rights in the political, regulatory and legal sphere. Such a view is appropriate in the context of privacy rights of the individual against the state. But the same cannot be said for the privacy claims of individuals against other individuals. The allocation of rights is only the beginning of a much more complex interaction. Some people may want and need more privacy than others. Privacy, by definition, is an interaction in which the informational rights of different parties collide. Different parties have different preferences on "information permeability" and need a way to synchronize these preferences or be at tension with each other. This would suggest that interactive negotiation over privacy would have a place in establishing and protecting privacy.

How should one analyze the role of bargaining over privacy? It is useful to consider as a framework for discussion the economic theorem of Nobel laureate Ronald Coase, a Chicago economist. Coase23 argues that in a conflict between the preference of two people the final outcome will be determined by economic calculus and (assuming reasonably low transaction costs) result in the same outcome regardless of the allocation of rights.24 If the final result is the same, who then should have the rights? According to Coase, it should be the "least cost avoider," i.e., the party who can resolve the conflict at the lowest possible cost.

Let us apply this discussion to privacy, using the example of telemarketing. Both of the parties to a telephone solicitation call attribute a certain utility to their preference. For example, it may be worth $3 to the telemarketer to have an opportunity to talk to the consumer. If necessary, she would be willing to pay a potential customer up to that amount.

Conversely, assume that the consumer would be willing to pay--grudgingly for sure--up to $4 to the telemarketer to keep her off the phone. The $4 is the value he places on his privacy in this instance. Thus, if the telemarketer has a legal tight to call the consumer at home, the latter would "bribe" her not to call in order to keep his peace and quiet.

The basic decision on regulatory rights is either to prohibit unsolicited telemarketing calls, or to permit them. But regardless of which rule is adopted, the call will not take place, because under our numerical example the value of privacy to the consumer is greater than its interruption is to the telemarketer. But if for some reason the value to the telemarketer should rise, say to $6, the consumer could not pay her enough not to call; and conversely, if the telemarketer would have no initial right to make unsolicited calls, she would pay for the consumer's cooperation by a payment of $4 or more, so that the call is accepted.

In other words, the distribution of the legal rights involved may largely determine who has to pay whom, not whether something will happen. Thus the law does not necessarily determine whether telemarketing calls actually take place, it only affects the final wealth distribution. This interactive concept is often difficult to grasp if one is used to think in absolutes of black-letter law. Common law, in contrast, has recognized transactions from the beginning. Indeed, the original legal cases which established the tort of privacy were not based on a finding that the plaintiff had a right to privacy, but instead that the plaintiff had a right to be adequately compensated.25

For privacy transactions to occur, however, there are several prerequisites They include:

  • Sufficiently low transaction costs.
  • A legal environment that permits transactions to be carried out.
  • An industry structure which permits transactions to occur.
  • Symmetry of information among the transacting parties.
  • No "market failure," i.e., no growing instability in the market.26
  • The ability to create property rights, or to exclude.

Courts have been reluctant to grant property rights to personal information outside of the case of luminaries. In one case,27 Avrahami vs. U.S. News & World Report, a gutless court28 managed to hold for two organizations that exchanged subscriber name lists without permission, even though Virginia Code 8.01-40 (Michie 1999) clearly provided that "Any person whose name, portrait, or picture is used without having first obtained written consent of such personfor advertising purposes or for the purposes of trade, such person may maintain a suitto prevent and restrain the use thereof." The statute also permitted the aggrieved party to recover actual and punitive damages.29 The court held that the inclusion of a name was "too fleeting and incidental," and that a person's name was not personal property. An appeal may be brought before the Virginia Supreme Court.

This reluctance of courts (and probably of legislatures) to recognize property rights in residual information s not surprising in light of the role of direct marketing in the economy. However, property is only not established from above by formal statutes or court decisions, but also from below, by the simple mechanism of an individual's ability to exclude others. Good fences create good neighbors, and good transactions as well. Electronics makes this increasingly possible. Such access control creates the possibility of bargaining, by transforming information from a "public good" (like a light house's flashing) to a private good (like a flashlight).
 

EXAMPLES FOR THE MARKET APPROACH
 

Telemarketing

As we discussed, because privacy and access are of value to parties in a telemarketing transaction, exchange transactions will emerge once they become technically feasible. How could this happen on a practical level? Signaling technology and telecommunications equipment provide now the capability to select among incoming calls electronically. This creates the precondition for access control by individuals, namely information about the calling party, which until now enjoyed the stealth of anonymity. Information is power, or rather it is worth money. Once this choice of avoiding calls is available to the called party without loss of important incoming calls, callers must offer incentive to be admitted. Friendship, family ties, reciprocity, useful information business--or a financial payment. What will therefore inevitably emerge is a system of individualized access charges.

Such a system might be described as Personal-900 Service, analogous to 900-service in which the caller pays a fee to the called. The caller would be automatically informed that the customer charges telemarketers for his time and attention.

Individual customers could set different price schedules for themselves based on their privacy value, time constraints, and even the time of day. They would establish a "personal access charge" account with their phone or an enhanced services provider, or a credit card company. By proceeding, the telemarketer enters into a contractual agreement The billing service provider would then automatically credit and debit the accounts in question.

Such a system will probably have a negative impact on the business of telemarketers. Currently, they "externalize" some of their costs by accessing customers at home at no charge to themselves other than their operating cost. Right now, consumers do not yet have the means to make the telemarketer compensate them for their attention. (In television, the audience gets at least to view an entertainment, sports, or news program.) Under personal-900, telemarketers will be forced to pay more for consumer access.

Consumers will benefit from the payment the receive for accepting calls. Some might even become "professional call-receivers." though telemarketers will no doubt refine ways to select the most likely buyers. Telemarketers will become more selective in who they try to reach, and spend more money on "fine tuning" their customer list. Technological tools to refine their search are intelligent agents sent out to find interested and affordable targets for solicitation.

Markets in access will develop. Consumers will adjust the payment they demand in response to the number of telemarketer calls competing for their limited attention span. If a consumer charges more than telemarketers are willing to pay, he can either lower access or will not be called anymore. Prices could vary by time of day.

Consumers will bear some of the portion of these costs. First, by way of higher prices for telemarketed products. The extent to which these costs can be shifted by telemarketers are in strong competition with other forms of marketing, and where consumers are price-inelastic, telemarketers will bear most of the added cost.30
 

Wireless Transmission

Market forces may also be able to resolve the unauthorized eavesdropping of wireless communication systems such as cellular and cordless telephones. True, such monitoring is illegal for cellular calls (though not for cordless phones), but it is widely practiced by scanning hobbyists as well as investigators. Just ask Prince Charles.

Eavesdropping is inefficient because it forces the participants in a communication to disguise the content of their transmissions, or to seek other ways of communicating. Thus, there are incentives for cellular service providers or equipment firms to offer scrambling devices.31

Encryption systems require extra equipment and may increase the amount of spectrum required for a given quality and information content of a signal. Customers who value privacy sufficiently will be willing to pay for the increased resource cost.32
 

Data Banks

Companies often sell or pass along information about their customers to others, for a variety of purposes. Insurance companies want to know the accident and medical history of new applicants; stores, whether new customers are credit-worthy; employers, whether job applicants have criminal histories; doctors, whether a patient has brought a malpractice suit in the past; and so on.33

In America individuals, firms, and governments have a substantial right to collect and redistribute personal and financial data about individuals. One could conceive of a market transaction system by which consumers offer companies payments to delete such information or refrain from distributing it. But could such a system work? In any transaction, both parties remain with information about it. The problem is not usually that a party saves that information, but rather that it disseminates it to others. The regulatory approach restricts some of these transfers. Could a market work instead?

The answer is usually "no" today. And only "maybe," in the future.

The reason for this can be found in the logic of reselling information. In many cases the holder of information about a second party could share that information with a third party at a higher price that the resulting reduction in value to him. Take, for example, a piece of credit history information on individual A that is worth $5 to B so long as B retains the information exclusively. If B distributes the data to another party, C, the direct value of the data to B may not be diminished at all, or may drop a bit to, say, $4. (It is one of the peculiar economic properties of information that it can usually be shared without any or only little loss of usefulness to its holder. The exceptions are business and trade secrets) Suppose C, too, is willing to pay up to $4 for the same information because it is of similar usefulness to him. Then the total value to B of not destroying the information is $8. And why stop at two beneficiaries? B could resell the information also to D, E, etc. So could C. In each case, the reduction in value of the information to one of its holders may be less that what another party will gain by obtaining it.

Hence the information will spread. Accordingly, the subject of the information, individual A, might have to expend a significant amount of money to prevent B from spreading the information. If it is of use to a hundred firms, each valuing it at say $4, it would take a $396 "bribe" for A to keep B from reselling it. If a resale of information is possible, B and C would market the same information about A, and they will drive down its price to the marginal costs of distribution. In that case, the information would spread greatly, but it would also be cheaper for A to bribe B at the outset. Yet all B would have to do is to contractually assure, in the transaction with C, against resale.

A could attempt to stop personal data from getting released to a third party by preferring to do business only with firms that agree to destroy such data. But companies would charge customers higher prices to compensate for the lost information resale. Furthermore, once many companies start refusing to sell information, each will have less information that before and hence a greater business risk, which would be reflected in the price. In effect, firms would charge for withholding the information through their product or service prices.

At the same time, any effort by A to pay a high price to B for non-revelation will likely raise the value of the information to B, C, etc--what is A trying to hide, anyway? And, wouldn't A have to pay a similar bribe to C, too, if the information reaches it? Thus, the more important the information is to more parties, the less affordable is a market transaction to purchase privacy. Only where information is of little use to others, or only to a very few, are privacy transactions likely.

An example is a video store. Such a business could advertise that its policy is to guarantee privacy. It would gain customers, and since the information is not usually very important to many other parties, it would lose little (the interest in political figures and celebrities is an exception). In contrast, it is hard to imagine a credit card company willing to be compensated for non-disclosure to other credit-extending firms. The value of preventing credit-fraud is so great to so many firms that any payment to undermine the reporting system would have to be quite high. Yet video-store disclosure is prohibited by law, while credit-reporting is legal. The reason is probably that the loss of information-value was low for video-viewing and nobody therefore mounted a fight against such legislation, while politicians running for election were particularly sensitive about the issue.

Even if A could pay B to withhold the information, it may not be possible in practical terms. One of the characteristics of information is that its exclusivity is almost impossible to acquire once multiple parties have access to it.

Any negotiating approach will only work for transactions between individuals and businesses. If the information is obtained by government, fewer market-based incentive exists to prevent transfer of the data. This is one reason why government agencies are becoming so active in selling information to others. They have little to lose. Where else could one go to get a driver's license?34

Currently, there is a right to collect, distribute and utilize personal data. What then if the rights were reversed and one would have to get a person's permission before retaining, transferring or utilizing personal data about him? If the information is of value to a bank and other credit institutions, they would acquire it by compensating the customer. Given the collective value of the information, such transaction would be likely. Hence, the information would be circulating. Consumer would be richer that before, but the information would be, in effect, still in the public domain.35

In conclusion, for personal data banks containing information about individuals, market transactions are either unlikely where the information is of use to many others, or it will be acquired by them. In either case the personal information, if valuable, becomes public information. For the future, one possibility that may help alleviate this problem is the emergence of encryptions.
 

Encryption

For markets in personal information to exist, it is necessary to protect that information from appropriation by others.

With digital technology, methods of protecting information with encryption have become powerful and convenient. Encryption goes back for thousands of years. It emerged primarily for the first electronic computers being the impetus as part of national security work, and spread to civilian computer applications. Encryption became popular with the release of the Data Encryption Standard (DES) to the public in 1977. DES is a 56 bit single key algorithm. To send a message to B using DES, A needs to encrypt it. This leaves open the risk that the key is intercepted, and anyone knowing the key can decrypt the transaction.

Dual key systems solved this problem. In this system, anyone who wants to receive a message has a "public" key. If A wants to send information to B in a secure way, he can encrypt it using B's public key. But the encrypted message can be decrypted only by using B's "private" key. Thus, there is never a need for the risk-laden transmission of private keys.

Dual-key encryption software has appeared with the spread of the Internet: Pretty Good Privacy (PGP) employs dual key cryptography and is distributed free of charge for private use. Business users pay. Privacy Enhanced Mail (PEM) uses DES encryption along with a dual key algorithm to secure mail transmission.

According to International Resource Development, the U.S. data encryption market has grown from $384 million in 1991 to an estimated $946 million in 1996.36

Where information is protected by encryption it is more marketable. Ironically, the U.S. government, for reasons of law enforcement and national security, has opposed easy and fully secure encryption, thus reducing the ability of individuals to control access to their information, to establish property rights, and to create the foundation for markets.

Present encryption, however, does not solve the problem of information resale to a third party C, once decrypted by the second party B. Solving that problem in the future would be a god-send to every owner of information and copyright, but it is hard to conceive how it might be done securely. A buyer of information cannot be stopped from memorizing and or photographing the de-crypted information on his screen and then reselling it.

Even so, giving A protection vis-a-vis B already goes a long way. It permits, for example for property rights in information about transactions between A and B to be held jointly. Both A and B hold keys to it, and therefore need each other's permission for their release. This would enable, for example A (a consumer) to require compensation from B (a credit card company) for releasing transaction information. It is true that B could copy information once it accessed it for one purpose, in other says that were not authorized. But to do this in a systematic way to thousands of customers would be a foolish business practice.

The dual-key systems would permit also individuals to sell information about themselves directly, instead of letting various market researchers and credit checkers snoop in their demographics, personal history, and garbage cans. Individuals would define a set of access rights: their doctor only would be allowed to view medical records. Other categories of information would have free access, while others would be costly. Presumably, the more valuable information is to the buyer, and the more negative it is to the seller, the higher the price. Some information would be priced too high for voluntary exchange. This system would also allow an individual to keep track of who asked for the information.. And, the reselling of the information would be authorized only by agreement of both key holders.
 

SELLING THE RIGHT OF PRIVACY

So far we have analyzed the role of markets in the provision of privacy in a largely pragmatic way--will it work? Yes, in some cases. No, in other cases. But at least as important is the normative question--should privacy be part of a market? While the market approach could be in many instances efficient on economic grounds and would differentiate according to needs, efficiency is not the only value to be concerned about. Just as there are economic trade-offs, so are there non-economic ones.

A distribution of privacy rights on a free-market basis would provide no protection for citizens against encroachment by the state. The only effective limits on government are those established through constitutional and statutory means. Therefore there would have to be two types of privacy rules, one for transactions among private parties, the other for transactions between private parties and the state. The former would be left, in part, to the market to allocate, the latter would involve a constitutionally protected right. Yet the question may be asked whether such a bifurcation in the treatment of the most mobile of resources-- information--is sustainable and practical.

Perhaps the most prevalent argument against markets in privacy is that affiance is not the only societal goal. Thus, some resources, such as privacy allocations, might be in the category of inalienable rights that are protected from encroachment and "commodification" by the market system.

This position leads to several responses to the notion of transaction-generated privacy:

  • Privacy is a basic human right, and not subject to exchange transactions.
  • Consumers cannot correctly assess the market value of giving up personal information.
  • A transaction system in privacy will disproportionally burden the poor.

To state that privacy is a basic human right is a noble sentiment with which I am in accord, but it does not follow that privacy therefore is outside the mechanism of transactions. As mentioned, a right is merely an initial allocation. It may be acquired without a charge and be universally distributed regardless of wealth, but is in the nature of humans to have varying preferences and needs, and to exchange what they have for what they want. Thus, whether we like it or not, people continuously trade in rights. In doing so they exercise a fundamental right, the right of free choice.

In most cases, a person does not so much transfer his right to another but chooses not to exercise it, in return for some other benefit. An accused has the right to a jury trial, but he can waive it for the promise of a lenient sentence. A person has the freedom of his religion, but may reconsider in order to make his spouse's parents happy. One can be paid to assemble or not to assemble, to forgo bearing arms, travel, petition, or speak. Voluntary temporary servitude in exchange for oceanic passage has peopled early America. Students have the right to read faculty letters of recommendation written in their behalf, but they usually waive that right in return for letters they hope will have greater credibility.37

These departures from textbook civics are socially undesirable if the rights in question were given up under some form of duress, for example if in a single-employer town workers must agree not to assemble as a condition of employment. But when an informed, lucid, sober, and solvent citizen makes a choice freely, the objections are much harder to make. They then boil down to a transaction being against public policy, often because it affects others outside the transactions (i.e., "negative externalities"). To make these transactions illegal, however, does not stop many of them, if there are willing buyers and sellers, but it makes them more difficult and hence costly. The extent of the success of such a ban depends, among other factors, on the ability of the state to insert itself into the transaction. In the case of privacy, which by its nature is an interactive use of information, such insertion is difficult. All it usually takes is to make the information transaction consensual. And if it becomes illegal to offer compensation to obtain consent, one can expect imaginative schemes to circumvent such a prohibition. After all, we now have over 3.0 lawyers per thousand population, up from 1.3 in 1970.38 Indeed, the success of government enforcement would then depend on intrusive actions by the state into private transactions. As important as privacy is, it will not necessarily override other values, such as free choice, the right to know, and the right to be left alone.

A second objection is that consumers have asymmetric knowledge relative to business about the value of their personal information, and that they consequently would be exploited (Gandy, 1996). The holders of this view discount the information-revealing process of competition. They must assume chronic oligopolistic behavior by business firms. Because such asymmetry in information would extend to all other dimensions of transactions as well, this view, to be consistent must be deeply skeptical of informed consent in consumer transactions generally.

The third objection to transactions in privacy is that they disproportionately harm the poor. Here, it is believed that it is especially those suffering from financial pressures and ignorance will sell their privacy rights to rich individuals and institutions. It is, of course, true that a poor person's priorities may often not include privacy protection. (In other cases, however, the opposite may hold and poor people need privacy more than those who can afford to create protective physical and organizational walls for themselves.) On the other hand, the same poverty condition may also make a poor person an unattractive target for a commercial intrusion. Telemarketers will prefer to make a pitch to individuals who can afford their products. The poor are best helped by money; to micromanage their condition through restricting their right to transact may well end up a patronizing social policy and inefficient economic policy. This leads to a conclusion that privacy, being a broad umbrella for a variety of issues, cannot be dealt with in a single fashion. Where transactions are not forthcoming, indicating a structural market failure, (perhaps due to monopoly or high transaction costs), or where negative externalities are large, regulations can be appropriate that reflect the policy preferences of the community for privacy and as well as for other values. But it must be recognized that, given the initial logic of the exchange transactions, they will find a way to assert themselves in other ways, thus undercutting the actual effect of the restriction and leaving them more in the nature of a societal statement of intent.

But where the level of privacy protection can be readily set by free exchanges among individuals there is no reason for state intervention, and one should instead strive to eliminate constraints against such transactions.

Those who believe that the market approach to privacy protection is overly generous to business violators of personal privacy might find themselves pleasantly surprised because the tools of access control will have shifted the balance of power to individuals and to the protection of privacy. Indeed, it will be the business users of personal information who will end up objecting to transactions. They are, of course, worried that while they (together with politicians and parties) have today relatively free access to individuals or to data about them, a system where they might have to pay compensation in return for consent might become expensive. they are correct, but what can they do about it? Access to a individual, even if sanctioned by law, will require the latter's cooperation. Right now, individuals do not yet have effective means to make those desiring personal information compensate them. But the tools to change this, such as encryption or caller identification, are here or near. Soon, equipment makers and communications service providers will enable consumers to conveniently sell access. And when this happens, those marketers who claim to live by the free market will also have to play (and pay) by its rules.

__________________________

ENDNOTES

1 Recall the TV series "Petticoat Junction."

2 Recall the movie "Pillow talk."

3 Olmstead v. United States, 277 U.S. 438 (1927).

4 See Westin (1967).

5 Seipp (1981).

6 For example, in 1962, the U.S. federal government had 1030 computer central processing units; in 1972, 6,731; in 1982, 18,747; and in 1985, over 100,000. (Linowes, 1989). Today, thier equivalent is probably beyond counting.

7 In the past twenty years the cost of access to a name on a computer-based mailing list has come down to about one thousandth of its earlier cost.

8 See, e.g., Richard Posner, (1981).

9 Warren and Brandeis, (1890).

10 The common-law copyright protection provided primarily that if one had not published information in one's possession, no one else could take and publish it. This was similar to a trespass and conversion

11 On the history of privacy, see Posner (1981); Simmel (1906); Westin (1965); Seipp (1978). In the United States, privacy is a non-partisan issue. The Privacy Act of 1974 was co-sponsored by Senators Edward Kennedy and Barry Goldwater.

12 Justice Louis Brandeis, in a famous dissent, wrote of "the right to be left alone--the most comprehensive of rights and the right most valued by civilized men." Olmstead at 478.

13 In the extreme, private information is so valuable to an individual as to make him a target for blackmail. See also Brown and Gordon (1980) for an economic perspective from the FCC.

14 See Richard A. Posner, The Economics of Justice, Harvard University Press, Cambridge, Massachusetts (1981, pp. 231-347).

15 See Noam, Eli. M., Telecommunications in Europe, Oxford University Press, 1993.

16 Organization of Economic Cooperation and Development, 1979.

17 Gilhooly, 1990, p. 1; CEC, 1990, p. 5.

18 Oster, Patrick; Galen, Michele; Schwartz, Evan, "Privacy vs. Marketing: Europe Draws the Line," Business Week, June 3, 1991.

19 Pipe, 1984b.

20 A 1990 example is a Congressional bill for monitoring of computer bulletin by the host system operators in order to prevent use for illegal activities.

21 Shaffer, David, Ban on Recording Telemarketing Upheld, St. Paul Pioneer Press, March 29, 1993. (For example, the state of Minnesota banned the use of automatic dialing equipment. The United States Supreme Court let stand a Minnesota Supreme Court decision upholding the ban despite arguments that such a law violates constitutional free speech protection.)

22 See Proceeding on Motion of the Commission to Review Issues Concerning Privacy in Telecommunications, Case 90-C-0075, State of New York Public Service Commission, March 22, 1991.

23 Ronald Coase, The Problem of Social Cost, The Journal of Law and Economics 3 (October 1960) 1-44.

24 If the final result is the same, who then should have the rights? According to Coase it should be the "least cost avoider," i.e., the party who can resolve the conflict at the lowest possible cost.

25 Posner, at 225. The early cases developing the tort of privacy often involved the use of a person's likeness is commercial advertising without permission or offer of monetary compensation. E.g., Paversich v. New England Life Inc. Co., 50 S.E. 68 (1905) (The unauthorized use of a man's photo in an insurance advertisement).

26 For a discussion of the limitations, see Noam, Eli M., Privacy in Telecommunications: Markets, Right, and Regulations, Office of Communication, United Church of Christ, April 1994, 5M.

27 Commonwealth of Virginia, Circuit Court of Arlington County, Arlington county, At Law No. 95-1318, June 13, 1996.

28 The court found that direct marketing accounted in 1995 for approximately one billion dollars in revenues.

29 In New York, property rights in one's likeness and name go back to the turn of the century. See New York Civil Right Law 8850, 51., enacted 1903.

30 One might argue that telemarketers will attempt to avoid absorbing this added cost by increasing their prices and then advertising a "fictitious" discount in return for a customer giving access rights. But such a practice will not succeed in a competitive environment where the initial price increase cannot be sustained.

31 For example, GTE has released since 1991 an encryption system for the cellular-consumer market. GTE Mobilnet developed the system because some customers--mostly government accounts and defense contractors--were concerned about the use of scanners that can monitor radio waves over which mobile-telphone signals.

32 A special problem of privacy in mobile communications is that the person initiating the call to a mobile customer does not pick its privacy level, and may be entirely unaware of any jeopardy. This "negative externality" suggests that some form of a signal which alerts such a caller to the presence of radio-segments in the transmission path.

33 The consumer information business is a multi-billion dollar a year business, centered around credit bureaus such as Equifax, TRW, and Trans Union. It has been estimated that the average American is on 100 mailing lists and 50 databases. Fisher, Susan E., What do computers know about you? Personal information too readily available, PC Week, Information Access Company; Vol. 8; No. 6; Pg. 156, February 11, 1991.

34 Additionally, data bank activities include several negative externalities, Rothfeder, Jefferey, Privacy for Sale, How Computerization Has Made Everyone's Private Life an Open Secret, Simon & Schuster, New York, 1992. For example, incorrect information contained in data banks. For the database providers, such inaccuracies, while bothersome and somewhat reducing the database value, may not justify the cost of attaining great accuracy. Yet for the data subject, the cost of an inaccuracy can be very high. Thus, some transactions of data transfer between two parties take place more often than is truly efficient, taking all costs and benefits into account.

35 One obstacle is that consumers will have to police companies to make certain that they do not utilize information without first making compensation. This difficulty could be dealt with the assistance of a service provider who would run "key word" searches to determine if a person's name and personal data are utilized for any uncompensated purpose. This, however, would also raise a new type of privacy concerns.

36 Hoffman, Lance J., Ali, Faraz A., Heckler, Steven L., "Cryptography Policy," Communications of the ACM, September 1994, Vol. 37, No. 9, p. 109.

37 Votes are not formally for sale, but candidates and parties vie with each other in making promises to benefit voters and interest groups, and if they renege on their part of the bargain, they may be punished at the next election. That is the theory.

38 Epstein, Richard, Simple Rules for a Complex World. Harvard University Press.

 


Economic Aspects of Personal Privacy

Hal R. Varian(3)

University of California at Berkeley


INTRODUCTION
 

The advent of low-cost technology for manipulating and communicating information has raised significant concerns about personal privacy. Privacy is a complex issue and can be treated from many perspectives; this whitepaper provides an overview of some of the economic issues surrounding privacy.1

In particular, I first describe the role of privacy in economic transactions and argue that consumers will rationally want certain kinds of information about themselves to be available to producers and want other kinds of information to be secret. I then go on to consider how one might define property rights in private information in ways that allow consumers to retain control over how information about them is used.
 

A SIMPLE EXAMPLE

The most fundamental economic transaction is that of exchange: two individuals engage in a trade. For example, one person, "the seller" gives another person, "the buyer," an apple; in exchange, the buyer gives the seller some money.

Let us think about how privacy concerns enter this very basic transaction. Suppose the seller has many different kinds of apples (Jonathan, Macintosh, Red Delicious, etc.) The buyer is willing to pay at most r to purchase a Jonathan, and 0 to purchase any other kind of apple.

In this transaction the buyer would want the seller to know certain things about him, but not others. In particular, the buyer would like the seller to know what it is he wants--namely a Jonathan apple. This helps the buyer reduce his search costs since the seller can immediately offer him the appropriate product. The transaction is made more efficient if detailed information about the consumer's tastes is available to the seller.

On the other hand, the buyer will in general not want the seller to know r, the maximum price that he is willing to pay for the item being sold. If this information were available to the seller, the seller would price the product at the buyer's maximum willingness to pay, and the buyer would receive no surplus from the transaction.

Roughly speaking the buyer wants the seller to know his tastes about which products he may be interested in buying; but he doesn't want the seller to know how much he is willing to pay for those products.

Armed with this simple insight, let us investigate some more realistic examples.
 

Search Costs

When many people talk about "privacy rights" they are really talking about the "right not to be annoyed." I don't really care if someone has my telephone number as long as they don't call me during dinner and try to sell me insurance. Similarly, I don't care if someone has my address, as long as they don't send me lots of official-looking letters offering to refinance my house or sell me mortgage insurance. In this case, the annoyance is in the form of a distraction--the seller uses more of my "attention" than I would like.

In the "information age" attention is becoming a more and more valuable commodity, and ways to economize on attention may be quite valuable. Junk mail, junk phone calls, and junk email are annoying and costly to consumers.

In the context of the apple example described above, it is as though the seller of apples has to tell me about each of the different kinds of apples that he has to sell before I am able to purchase.

It is important to recognize that this form of annoyance--essentially excess search costs--arise because the seller has too little information about the buyer. If the seller knew precisely whether or not I was interested in buying insurance or refinancing my mortgage, he could make a much better decision about whether or not to provide me with information about his product.

In the context of the apple example: it is in both parties' interest to know that the buyer will only purchase a certain kind of apple. The buyer has every incentive to present this information to the seller, and the seller has every incentive to solicit this information from the buyer.

This is, in fact, how the direct mail market works. If I subscribe to a computer magazine, I will end up on a mailing list that is sold to companies that want to sell me computer hardware and software. If I refinance my house, I am deluged with letters offering me mortgage insurance. In these cases the seller is using information about me that is correlated with my likelihood of purchasing certain products. (See [1] for a discussion of some current trends in direct marketing.)

In this context the more the seller knows about my preferences the better. If, for example, I am interested in buying a computer printer, it may well be in my interest and the seller's interest for this fact to be known. If I am only interested in a laser printer, this is even more valuable information since it further reduces search costs for both the buyer and the seller. If I already have a laser printer that I am happy with, the seller may find it valuable to know that since he will not have to incur costs trying in vain to sell me a new printer.
 

Secondary Users of Information

When a mailing list is sold to a third party, the relationship between the buyer's original interests and the seller's interest may become more tenuous. For example, suppose the list of computer magazine subscribers is sold to an office furniture supplier. Some of the people on this mailing list may or may not have any interest in office furniture.

Even though the first two parties in the transaction--the individual who may want to buy something, and the seller who may want to sell him something--have incentives that are more or less aligned, the transaction between the original owner of the mailing list and those to whom it is sold do not have such well-aligned incentives.

Economists would say that an externality is present. The actions of the party who buys the mailing list will potentially impose costs on the individuals on that list, but the seller of the mailing list ignores those costs when selling it.

These costs could be mitigated, to some degree, if the individual who is on the mailing list has a voice in the transaction. For example, the individual could forbid all secondary transactions in his personal information. Or, more generally, the individual could allow his information to be distributed to companies who would send him information about laser printers, but not about office furniture.

These considerations suggest that the difficulty in the "annoyance" component of privacy could be significantly improved if the communications channels between the buyers and the sellers were clearer, the information conveyed was more accurate, and third-party transactions were restricted only to those transactions that the original consumers authorized.
 

Incentives Involving Payment

Let us now consider a more difficult case, the case where the buyer's revealing information about himself is detrimental. Suppose that the buyer wishes to purchase life insurance but knows information about his health that would adversely influence the terms under the which seller would offer insurance. In this case, the buyer does not want information released that would influence the price at which the insurance would be offered.

Suppose for example that the potential buyer of insurance is a smoker, and knowledge of this information would result in higher life insurance premium. Should the buyer be required to truthfully release the information? Since the information here concerns the price at which the service (insurance) is offered, the incentives are perfectly opposed: the buyer would not want to reveal that he is a smoker, while the seller would want to know this information.

Note, however, that a nonsmoker would want this particular information about himself revealed. Hence the insurance company has an easy solution to this problem: they offer insurance at a particular rate appropriate for smokers, and then offer a discount for non-smokers. This would succeed in aligning information incentives for the buyer and seller.

More generally, suppose that the price that the seller would like to charge is higher for people with some characteristic C. Then people who have that characteristic have bad incentives to reveal it, but people who don't have that characteristic have good incentives to reveal it. It is in the interests of the seller to construct the transaction in a way that the information is revealed.
 

CONTRACTS AND MARKETS FOR INFORMATION

We have seen that several of the problems with personal privacy arise because of the lack of information available between concerned parties. Perhaps some of these problems could be mitigated by allowing for more explicit ways to convey information between buyers and sellers.

For example, it is common to see boxes on subscription cards that say "check here if you do not want your name and address redistributed to other parties." This is a very primitive form of contract. A more interesting contract might be something like: "Check here if you would like your name distributed to other parties who will provide you with information about computer peripherals until 12/31/98. After that, name and address will be destroyed. In exchange you will be paid $ 5.00 for each list to whom your name and address is distributed."

Although it would be hard to fit this sort of contract on a subscription response card, it would be easy to fit it on a Web page. The contract that is being offered implicitly assigns property rights in an individual's name and address to him or herself, unless the individual chooses to sell, or more properly, rent, that information.

This particular legal policy seems quite attractive: assign a property right in information about an individual to that individual, but then allow contracts to be written that would allow that information to be used for limited times and specified purposes. In particular, information about an individual could not be resold, or provided to third parties, without that individual's explicit agreement.

This idea appears to have been most thoroughly explored by [Laudon, 1996]. He goes further than simple contracting and suggests that one might sell property rights in personal information on markets. As Laudon points out, there is already a large market in personal information. But the property rights are held by those who collect and compile information about individuals--not by the individuals themselves. These third parties buy and sell information that can impose costs on those individuals, without the individuals being directly involved in the transactions. In economic terminology, there is an externality.

The personal information industry in the US is primarily self-regulated, based on the so-called Fair Information Practices.2

There shall be no personal record systems whose existence is secret;

Individuals have rights of access, inspection, review, and amendment to systems containing information about them;

There must be a way for individuals to prevent the use of information about themselves gathered for one purpose for another purpose without their consent;

Organizations and managers of systems are responsible for the damage done by systems for their reliability and security;

Governments have the right to intervene in the information relationships among private parties.

The European Community has more explicit privacy regulation; for more on international regulations, see the Electronic Privacy Information Center's3 web page on International Privacy Standards.4

It is worth observing that the Fair Information Practices Principles would automatically be implemented if the property rights in individual information resided solely with those individuals: secret information archives would be illegal; individuals could demand the right of review before allowing information about themselves to be used; and those who wanted to utilize individual information would have to explicitly request that right from the individual in question or an agent acting on his behalf.

Laudon goes on to propose that pieces of individual information could be aggregated into bundles that would be leased on a public market he refers to as the National Information Market. For example, an individual might provide information about himself to a company that aggregates it with 999 other individuals with similar demographic and marketing characteristics. Such groups could be described by titles such as "20-30 year old males in California who are interested computers," or "20-30 year old married couples interested in home purchase."

Those who wanted to sell to such groups could purchase rights to use these mailing lists for limited periods of time. The payments they made would flow back to the individual users as "dividends." Individuals who found the annoyance cost of being on such lists greater than the financial compensation could remove their names. Individuals who felt appropriately compensated could remain on the lists.

Although there are many practical details of implementation that would need to be solved to implement Lauder's market, it is important to recognize that information about individuals is commonly bought and sold today by third parties in market-like environments. The National Information Market simply gives individuals an economic stake in those transactions that they currently do not have.
 

Personal information

There may be information about me that I don't want revealed just because I don't want people to know it. For example, many people are very touchy about personal financial information being revealed. They don't want other people to know how much income they make, or how much they paid for their house or car.

In some cases there is a social interest to making such information public. Consider the following two examples.

A computer consultant in Oregon paid the state $ 222 for its complete motor vehicles data base, which he then posted to a Web site, prompting charges of privacy violations from people who complained that he had invaded their privacy. The database allows anyone with an Oregon license plate number to look up the vehicle owner's name, address, birthdate, driver's license number, and title information. The consultant's motive in posting the information, which anyone can obtain for a fee by going to a state office, was to improve public safety by allowing identification of reckless drivers. Oregon Governor John Kitzhaver says that instant access to motor vehicle records over the Internet is different from information access obtained by physically going to state offices and making a formal request for information: "I am concerned that this ease of access to people's addresses could be abused and present a threat to an individual's safety." (Associated Press 8 Aug 96)

Victoria, the first city in Canada to put its tax-assessment rolls on the Internet, has pulled the plug after British Columbia's Information Commissioner announced an investigation into the practice, believing it violates privacy laws. (Toronto Globe and Mail 27 Sep 96 A3)

In each of these cases there is a public interest in having this information publicly available. Making information available about owners of motor vehicles may help insure safer operations. Making sales prices of houses available may help ensure the accuracy of tax assessments. My neighbors may care about the assessment of my house, not because they particularly care about my tax assessment, but because they care about their tax assessment.

Whether or not such information should be publicly available would ideally depend on an individual benefit-cost analysis. If I am willing to pay more to keep my assessment private than my neighbors would be willing to pay to see it, we have a potential way to make everyone better off: I pay my neighbors for the right to keep my assessment private. If they value seeing my information more than I value keeping it private, then they pay me for the right to see it.

This sort of transaction is not really practical for a variety of reasons, but the same principle should apply in aggregate: one has to weigh the "average" potential benefits from making this sort of information public to the potential costs of keeping it private. The presence of a market where individuals can sell information about themselves helps provide a benchmark for such benefit-cost calculations.

Certain kinds of information can be collected and distributed without revealing the identity of individuals. [Froomkin, 1996] explores some of the legal issues involving anonymity and pseudonymity; see [Camp, Harkavey, Yee, & Tygar, 1996] for a computer science view. [Karnow, 1994] proposes the interesting idea of "e-persons", or "epers," which serve to provide privacy while conveying a relevant description of the individual.
 

Costs of acquiring public information

Many sorts of public information have been available at some transactions cost: in order to find housing assessments, it has typically been necessary to travel to a city or county office and look up the information. Now that increasing numbers of consumers are computerized it is possible to acquire this information much more inexpensively. Information that was previously deemed useful to be publicly available under the old transactions technology, may now be deemed to be too available.

This, it seems to me, has a reasonably simple solution. The information could be made available in digital form, but at a price that reflected the transactions costs implicit in acquiring the information using the old technology. The price paid for the information could then be used to defray the cost of making it publicly available.

For example, suppose that, on average, it took a citizen one hour to go to the country records department, look up a tax assessment and photocopy the relevant material. Then a reasonable charge for accessing this information online might be on the order of $ 25 plus 20 cents or so per assessment requested.

This sort of charging schedule essentially restores the status quo, provides some funds for local government, and offers an additional choice to individuals. People who didn't want to pay the $ 25 could make the trip to the county records office and access the same information there "for free" (i.e., paying no monetary cost.)
 

ASSIGNMENT OF RIGHTS

I have argued that an appropriate way to deal with privacy issues is to determine a baseline assignment of rights, but allow individuals to trade those rights if they desire to do so. If there are no transactions costs in trading or negotiation, the initial assignment of privacy rights is arbitrary from the viewpoint of economic efficiency.5

To see this, suppose that it is worth 50 cents a week to me to have my name omitted from a junk email list, and that it is worth 20 cents a week to the owner of the junk email list to have my name on it. If the owner of the email list has the right to put my name on it without consulting me, then I would have to pay him some amount between 20 and 50 cents to have him remove it. On the other hand, if he has to seek my permission to use my name, it would not be forthcoming, since the value to him of having my name on the list is less than the value to me of having it off. Either way the property rights are assigned, my name would end up off the list.

If there are significant transactions costs to making contracts such as these, the standard Coasian arguments suggest that an efficient allocation of rights would be one in which the transactions and negotiation costs are minimized. In this case, the appropriate comparison involves the transactions cost to the individual to having his or her name removed from the list to the cost to the mailing list owner of soliciting permission from individuals to add them to the list.

When phrased in this way, it appears that the current practice of adding someone's name to a list unless they specifically request removal probably minimizes transactions costs. However, the rapid advances in information and communications technology may change this conclusion. The development of social institutions such as Laudon's market would also have a significant impact on transactions costs.
 

SUMMARY

Privacy is becoming a very contentious public policy issue. The danger, in my opinion, is that Congress will rush into legislation without due considerations of the options. In particular, a poorly-thought-out legislative solution would likely result in a very rigid framework that assigned individuals additional rights with respect to information about themselves, but did not allow for ways to sell such property rights in exchange for other considerations.

In my view, legislation about rights individuals have in information about themselves should explicitly recognize that those rights can be "leased" to others for specific uses, but cannot be resold without explicit permission. This simple reform would lay the foundation for a more flexible, and more useful policy about individual privacy.

In addition it would enable business models that would potentially allow for reduced transactions costs and better matches between buyers and sellers.

__________________________

ENDNOTES

1 There are many other aspects of privacy that we do not cover. For example, there are issues involving misrepresentation, unauthorized publicity, and so on that we omit due to lack of space.

2 Certain sorts of behavior have legislative protection; e.g., lists of rental videos.

3 http://www.epic.org

4 http://www.epic.org/privacy/intl/default.html

5 Economic efficiency is, of course, only one concern involved in assignment of property rights. Considerations of fairness, natural rights, etc. are also relevant.
 

REFERENCES

[1] Blattberg, R.C., & Deighton, J., Interactive marketing: Exploiting the age of addressability. 33(1) Sloan Management Review 5, 14 (1991).

[2] Camp, L. J., Harkavey, M., Yee, B., & Tygar, J.D., Anonymous atomic transactions, Tech. Rep., Carnegie Mellon U (1996). http://www.cs.cmu.edu/afs/cs/user/jeanc/ www/ home.html.

[3] Froomkin, A.M., Flood control on the information ocean: Living with anonymity, digital cash, and distributed databases, Tech. Rep., U. Miami Sch. L. (1996). http://www.law. miami.edu/froomkin/.

[4] Karnow, C.E.A., The encrypted self: Fleshing out the rights of electronic personalities. In Conference on Computers, Freedom, and Privacy (1994).

[5] Laudon, K.C., Markets and privacy. 39(9) Communications of the ACM, 992, 104 (1996).

 


Extensions to the Theory of Markets and Privacy: Mechanics of Pricing Information
 

Kenneth C. Laudon
Stern School of Business
New York University
klaudon@stern.nyu.edu
 

The theory of markets and privacy begins with the understanding that the current crisis in the privacy of personal information is a result of market failure and not "technological progress" alone. The market failure has occurred because of a poor social choice in the allocation of property rights. Under current law, the ownership right to personal information is given to the collector of that information, and not to the individual to whom the information refers. Individuals have no property rights in their own personal information. As a result, they cannot participate in the flourishing market for personal information, i.e., they receive no compensation for the uses of their personal information. As a further consequence, the price of personal information is so low that information-intense industries become inefficient in its use. The price is low because the price of personal information does not reflect the true social costs of coping with personal information. The market is dominated by privacy-invading institutions. And as a further result, there is a disturbing growth in privacy invasion, an excessive and abusive disregard for the interests of many in keeping elements of their life private, or at least under their control.

These abuses of personal information are reflected in attitude surveys which over the last decade have recorded a growing public distrust in how major institutions use personal information, a wide-spread feeling of frustration and hopelessness, and the belief that "individuals have lost all control over their personal information." (Equifax, 1996). There is a growing anger in American public opinion over the loss of control over personal information.

Like other market failures, the personal information market failure results in enormous asymmetries in power and information. For many Fortune 500 firms, personal information is a strategic asset. As it turns out, privacy invasion pays handsome rewards. There is already today a lucrative market in personal information, but ordinary individuals cannot participate in the market (because they have no property interest), they are completely mystified about how their personal information is used in the market, and they have almost no tools to influence how major institutions use their information. The transaction costs for obtaining information by large institutions are small and falling, while the transaction costs which individuals incur in obtaining even a copy of their, say, medical record, are very high. In other words, the tools available to citizens to protect their information rights--as few as they are--are too costly to use! Contrast this situation to the average person's understanding of the automobile market in the U.S.: trading locations are known, seller and buyer rights are fairly clear, information about quality can be obtained, transaction costs for buyer and seller are more equal, and disposition of the asset is finally decided by the individual.
 

THE LIMITS OF PRIVACY LEGISLATION

A second element to the crisis in privacy is the inability of the society to elaborate a set of concepts and policies to rectify the market failure. Over the last twenty years, since the landmark report of the Privacy Commission in 1972, the societal response to privacy invasion has been a regulatory response driven from Washington and State capitals. In an effort to correct the market failure, political executives and legislators have passed more than twenty pieces of federal legislation, and hundreds of state statutes, which attempt to provide individuals with due process rights to their personal information, without at the same time granting individuals ownership rights.

The regulatory efforts of the last twenty years have attempted to reduce the asymmetries in information and power which the market failure creates. Regulatory efforts have tried to define due process rights for individuals vis-a-vis personal record systems. These efforts are informed by a doctrine called "fair information practices" developed in the late 1960s, an era when only a few large scale national institutions possessed national information databases.

There are two kinds of government regulation in response to market failure situations. One type affirms a "natural monopoly" and tries to regulate price and access. Public utilities and common carriers fall into this situation. The other kind of government regulation attempts to introduce competition, create a marketplace, and reduce the market power of large institutions. Unfortunately, privacy legislation of the last twenty years falls into the former camp: it reaffirms the market failure by securing the property interest in personal information for the gatherer, and denying ownership to individuals.

The current privacy legislation perpetuates a central dilemma of the information age: how can we live in a society where individuals can have as much information privacy as they want, and yet where the economic benefits of using personal information in commerce are optimized?
 

THE LEGAL AND ECONOMIC FOUNDATIONS FOR INDIVIDUAL OWNERSHIP OF PERSONAL INFORMATION

An earlier paper attempted to lay the legal and economic foundation for a true marketplace for personal information [Laudon, 1996]. In this marketplace, individuals would retain the ownership in their personal information and have the right, but not the obligation, to sell this information either to institutional users directly, or more likely, to information intermediaries who would aggregate the information into useful tranches (e.g. blocks of one thousand individuals with known demographic characteristics) and sell these information baskets on a National Information Exchange.

Individual ownership of personal information can be anchored within British and American common law. The common law tort of appropriation protects the right of celebrities to own their images, likenesses, voices, and other elements of their persona. To appropriate personal images of celebrities for commercial purposes without consent or payment is recognized by the courts as an appropriation. Likewise, it is conceivable that courts and juries could be convinced to protect the personal "data images" of ordinary citizens. These data images have somewhat less resolution than a photographic image, but they are increasingly and profoundly descriptive and predictive of human behavior. As computers extend their powers, these data images will approach photographic resolutions.

The economic foundation for individual ownership of personal information can be found in the theory of markets (and related theories of governance) and the theory of externalities. Markets are likely the most efficient mechanisms for allocating scarce resources. Governments should intervene in markets only if markets fail. Markets do fail under conditions of monopoly, asymmetries in power and information, and in the case of public goods, e.g., clean air. Governments should either seek to restore markets or regulate the activity. In the case of personal information, the market has failed because of asymmetries in power and information brought about by poor social choice in the allocation of property rights to information. The price of personal information is far too low, and therefore its abuse in the form of privacy invasion is far too cost beneficial to those institutions that dominate the market. The function of government here should be to restore the power of one class of participants in the market, namely individuals, by vesting ownership of personal information in the individual. A second function of government is to ensure the orderly functioning of a personal information marketplace.

The failure of the marketplace results in significant negative externalities for individuals. These externalities are experienced as excessive indirect and direct costs involved in "coping" with information. Coping costs include tangible costs like excessively large mail handling facilities (public and private), and loss of attention, as well as intangible costs like loss of serenity, privacy, and solitude. These negative externalities must be balanced against the positive externalities of nearly unlimited exploitation of personal information which results in enormous amounts of marketing information being delivered to consumers (whether they want it or not). However, it can no longer be argued that these positive externalities fully compensate individuals or society for the negative costs of unlimited exploitation of personal information.
 

ADDING VALUE DOES NOT LEGITIMIZE APPROPRIATION

Information gathering institutions often argue that a personal name and address has zero value. In fact they argue, personal medical, credit and related information also has no value per se. The large institutions, for whom personal information is a strategic asset--or so they claim in their annual reports-- argue that by collecting information on individuals from a variety of sources, and mixing this information with other information, they create the value in personal information, and therefore this value belongs all to them. In this argument, property results from the "sweat of the brow" expended by gathering institutions.

"Sweat of the brow" is only one element in the theory of property. Actually, the largest portion of wealth in America is inherited, not created. Surely "sweat of the brow" is a weak theory when it comes to personal information. For instance, if a thief steals your car, fixes the car, paints it, and mixes it with a fleet of stolen cars, then indeed the thief has added value to the car and the collection. But these actions by the thief do not therefore transfer ownership to the thief. To argue that information gathering institutions add value to my personal information by compiling, collating and mixing in a database, does not solve the question of ownership. To say information gathering institutions have exclusive property rights to my personal information because they have added value to the information simply begs the question of who owns my personal information. Whether or not my personal information appears in a collection, or was mixed with other information, is not decisive for the question of ownership.
 

Research on the Mechanics: How Will Personal Information be Priced?

The theory of markets and privacy raises many mechanical questions of implementation. Currently, with colleagues at New York University's Stern School of Business, we are planning research in a number of areas. Here are some interesting researchable questions raised by readers of an earlier theoretical paper:

What would individual citizens deposit in local depository institutions? Their "information" or their "information rights?" How would these rights be transferred?

What would be included in these rights--the right to use only certain information? All information? For what period of time could these rights be sold?

How would depository institutions or traders on the National Information Market, price individual personal information?

How could people be compensated for the use of their information? How could any mechanism keep track of the uses of all this personal information over a period of a year?

I believe each of these questions has a sensible and practical answer. We are exploring answers in a forthcoming book called Privacy and Markets. In this paper, we sketch out two lines of on-going research which address the question of information pricing.
 

FINDING THE PRICE OF PERSONAL INFORMATION BASKETS

It is amazing how little is known about the economics of personal information in an age when the trade in personal information has become so vital for the conduct of efficient markets and transaction systems. Currently we are pursuing two lines of research: (1) the economics of existing personal information markets, and (2) experimental simulation of market pricing mechanisms to test various formal models of pricing.
 

The Economics of Existing Personal Information Markets

In this "information economy" about 65% of the GDP is generated in the "information sector" and about 70% of the labor force is engaged in "information processing" activities (which does not include lower level service activities). The precise role of personal information in the information sector--as opposed to all other kinds of information on things and places--is not known but it can be assumed to play an important role. The FIRE (Finance, Insurance, Real-estate) industry is one of the largest generators and users of personal information, accounting for 1.1 trillion dollars in GDP, over 500,000 establishments and seven million employees. Even here, there is no accounting of the dollar amount of personal information trade. The Statistical Abstract of the United States does not have an index entry for "personal information," or for "information." How odd this all seems as we enter the "Age of Information."

Every day trained professionals buy and sell enormous baskets of information on millions of individuals in the form of mailing lists, computer data files, demographic information, and locational information. We know that governments, credit granting institutions, insurance firms, and credit reporting agencies are the major sellers of personal information, as well as the major purchasers. We know that this trade in personal information involves billions of dollars in trade. And yet we don't know the total size of this trade, how traders decide the purchase and selling prices, or even how much a driver record, medical insurance, or credit record is really "worth."

One line of our research, therefore, is a series of interviews and questionnaires aimed at professional information brokers in the FIRE and marketing industries. The aim of this research will be to understand the size, structure and operation of the existing marketplace in personal information, and to understand the underlying pricing strategies of market participants.
 

Experimenting with the Economics of Future Personal Information Markets:
Finding the Price of Information

On one Internet site, people are paid to read advertisements, and to reveal their personal preferences. More sites like this can be expected and are a harbinger of future information markets in which individuals are paid for revealing information about themselves. In fact, personal information markets are springing up all around us in response to the reticence which individuals feel about giving away personal information. In another unobtrusive information market, customers at supermarkets are given "discount cards" scanned at every purchase. The scanned information contains their personal name, as well as all purchase information. The information is then sold to marketers and manufacturers. Customers receive payments in the form of store discounts on selected items (which people truly want) and other "payments" in the form of product promotions sent to their home, or unsolicited phone calls to their home (which most people do not want).

How do ordinary people decide the purchase and selling prices of their or other personal information? We will be pursuing answers to this question at the Economics Laboratory at NYU's Department of Economics. Using student subjects, we will create a market place in which baskets of personal information having variable attributes of demography, accuracy, and currency can be traded by student subjects (see the article by Hal Varian 1996 in this collection). At the end of the experiment, subjects will be allowed to keep their trading profits, a nominal reward for participation.

Using this data we hope to test various formal models of information pricing. The pricing of personal information is probably no different from the pricing of other kinds of information. Students must answer this question every day: how much is the basket of information called a "college degree" really worth? My MBA students continually worry about this question: will I ever earn back the $50,000 dollars which an MBA degree costs? What formal models do we have to answers this question, and to test in the laboratory or against real-world data?

Discounted cash flow methods with no learning. Students and experts tend to see the value of college degrees, and perhaps all baskets of information, as a rather linear return on investment problem, in which the worth of information today is equal to the discounted cash flows which the information will produce over a period of time. Or

Where

NPV = the net present value of information

C0 = the cost of information at the start (t=0)

At = the cash flow at the end of the period t

T = the number of years we are calculating returns

r = the risk based discount rate based on the rate of return for investments with similar risk.

This model assumes that the possession of information today does not really influence the possession of information in the future, and therefore it assumes a linear view of the information valuation and acquisition process (See Figure 1).
 

Whenever people value a college degree in terms of the its future income producing potential, they typically are using a discounted linear cash flow model. Similarly, information brokers in a marketplace might price information baskets based entirely on the expected future cash flows associated with the basket of information.

Discounted cash flow with "learning" effects. While the acquisition of knowledge and information can be serendipitous, abrupt, and unexpected, it is often cumulative. That is, learning a piece of information now will help you learn more information in the future. See Figure 2.

People and organizations do learn sometimes, they accumulate information, store it in the form of learned routines, and occasionally act on what they have learned. This would suggest a branching problem in which the value of information today is actually much greater than the cash flows produced by that single basket of information. Instead, we need to increment the discounted value of a single basket by an amount equal to the value of future information that might be learned (and which could not be learned or acquired if the initial basket of information was not purchased).
 

Dos Santos has suggested a two stage discounted cash flow model that could be useful in predicting how individuals value information baskets:
 

Where

E(Vssp) = the expected value of second stage learning; and

E(Vssp) =

Where:

pi = probability that state i occurs

bi = expected revenues generated from the information

Cs = cost of obtaining the information in the second stage

In this instance, when students say "the finance course I take today will help me make a killing on stock options after I graduate" they are using some sort of two-stage discounted cash flow model to establish the value of information. So also information brokers in a marketplace might pay a great deal more than net present value for information baskets based on returns from a single basket. Instead, brokers might pay a "learning premium" in the belief that what personal information they buy today about individuals will allow them to learn even more about these same individuals in the future.
 

Discounted cash flow with "learning" effects and "loss avoidance." So far we have assumed that individuals are forced to learn in the second stage. In fact, once people know a little information, they can decide whether or not to learn more and how much to spend on learning it. So, for instance, students will say "I don't know if I should seek a position in Europe or the U.S. I will take some courses first, and then I'll decide that when I 'get there.' If I need additional courses to meet some requirement, I will take the courses when needed." When students "get there," they may find that one option is worth 0, and another option is worth some positive number. They will choose the option with the highest benefits and avoid losses or zero benefits. See Figure 3.
 

Learning poses many hazards. One might learn the wrong thing, or put learning to the wrong ends. In teaching a course on business ethics, the faculty often point out to students that what they learn in business school could indeed lead to being in a position to make just the right decision at the right time, and to make a great deal of money. Or, alternatively, what they learn today could lead directly to Club Fed, that federal penitentiary system established for white collar felons. Sometimes, people learn the wrong things, or learn the right things but apply them to the wrong ends. The point of learning is in part to avoid future loss. People may pay a considerable amount to avoid a loss.

Dos Santos provided a modified version of two stage discounted cash flows by setting the revenues of the second stage learning to:

In this formulation, the value of information learned now is greater than merely the summation of discounted cash flows in the first two time periods. The value of information is greater by an amount equal to the value of avoiding a loss or a zero return on the cost of investing in new information. Information brokers in an information marketplace might pay a "loss avoidance" premium for information which they thought could help them avoid future losses. For instance, knowing the DNA information for a basket of individuals would be very useful and valuable for employers and insurers because it could greatly decrease future losses, or at least permit adjusting the cost of insurance to personal risk.

Options models. Discounted cash flow models, no matter how modified, have limitations. All possible outcomes are assumed known, the probability of each outcome is known, and the value of each outcome is known. Also, most troublesome, is the selection of the discount rate which has a powerful effect on economic benefits. One is supposed to choose a discount rate of roughly equivalent market risk. The risk of buying various kinds of information is not well understood.

One possibility is to consider the price of a basket of information today as an option on future revenue streams which will come from the use of that information in the future. A call option gives the holder the right to purchase a share of stock for a set exercise or strike price in the future. The real market price of the stock may be much higher than the stock price because it either pays dividends or simply has a current value greater than or equal to the exercise price. Of course, there's always the risk that the stock value will decline lower than the strike price, and hence the option will be worthless.

Likewise, buying a basket of information today is like buying an option on future uses of that information. Just like a stock option, the owner of an information basket may not exercise the option if, at the time of the exercise date, the expected revenues are less than the exercise price. So, for instance, when students say, "I don't know what will be 'hot' five years from now--investment banking or corporate finance--so I plan to take a wide variety of courses and be ready to move in either direction when the time comes," they are unconsciously invoking an options model to evaluate the "worth" of today's information. They are in effect buying an option (paying $50,000 to purchase MBA courses) on an underlying asset (their future possible careers) in the belief that at some future point they will be able to make a judgment or decision which will produce returns of some sort.

Options models are useful to consider because (a) the price of options reflects the riskiness of the underlying security, and (b) they reflect the ability of individuals to make decisions about future information gathering costs over time. A model for pricing options as been developed by Black and Scholes, and a modification of that work by Margrabe offers the possibility to extend the original model to a situation where one risky asset (information gathering costs) for another risky asset (future revenues from baskets of information). These models are beyond the scope of this paper but are described in Dos Santos. In options models, the price of the option is related to the underlying variance of the security or stock. The greater the variance, the greater the price of the option because the potential rewards are greater. This is opposite of the case with discounted cash flow models where variance of future revenues decreases today's value. Options models will probably overestimate the price of some personal information, but they may be quite accurate for other kinds of information. For instance, for certain types of information which does not change much--say for instance name and social security information-- market brokers would probably pay little using an options model. However, for information which has great variance and where currency is important--like, say, one's medical condition--brokers might pay a lot.

Information and co-specialized information assets. The value of a basket of information is probably a non-linear function of the number of information dimensions which characterize the basket. This seems to defy the law of diminishing returns. Few things defy the law of diminishing returns. Networks may be one such phenomenon. It costs close to zero to add another person to a computer network, or telephone network, but the margin revenues or other gains are substantially greater than zero. Brands may follow a similar pattern: the more people who use Microsoft Windows the more valuable the operating system (and Microsoft) become.

Personal information baskets may have network features. We might think of information baskets as interconnected network nodes, and the more nodes we have the more valuable the whole package. A name and address, by itself, has little value. A name, address, and occupation, has considerably more value; name, address, occupation, zip code, medical history, driver history, and credit record probably has a much higher market value. The more dimensions included in the basket, the greater the value by some exponent. At some point of course the cost of finding out more information exceeds the expected returns.

There are several implications. An individual person who sells rights to his/her information should charge considerably more for selling the "complete persona" than should be charged for, say, just a medical record, or credit history. A buyer of the complete persona should be willing to pay a great deal more than for small bits and pieces of the person, especially given the likely high gathering costs for small chunks of personal information which later must be collated with other information.

An interesting situation arises for holders of information assets. For instance, if an employer already holds job performance and psychological evaluation information on an employee, along with demographic data, how much would the employer be willing to pay for additional dimensions of employee persona like medical records, DNA records, credit, and so forth. Obviously the value of information on hand (co-specialized assets) would be greatly enhanced through the purchase of a few more pieces of information. But the sellers of personal information would not know this fact. In other words, holders of information are advantaged in the marketplace, and the buyers are better off than the sellers because the buyers' total information value will greatly expand by purchasing just a few pieces of information and mixing it with information already on hand. The sellers will not know this. The best strategy for sellers will be to sell the "whole persona" rather than sell bits and pieces. The best strategy for buyers will be to avoid buying the "whole persona" and instead to buy bits and pieces.
 

CONCLUSION

It is unclear at this time which of the four models (a-d) are most useful in characterizing how people evaluate the price of information, or which strategies will emerge in future information markets. As Tversky and Kahneman have discovered, people overestimate the risks of extremely rare events (shark attacks) and greatly underestimate the risk of likely events (having an accident on the way to the beach). Likewise, people may underestimate the future value of information gathered today relative to the value of its future uses, and overestimate the cost of today's information gathered today relative to its future value. We simply don't know how people in fact behave in information markets. If we to hope to understand privacy in our time, we will have to understand the market mechanisms which shape the flow of personal information.

_________________________

REFERENCES
 

Laudon, Kenneth. Markets and Privacy, 39 (9) Communications of the ACM (September 1996).

Varian, Hal R., Economic Aspects of Personal Privacy, Paper submitted to NTIA Panel @http:// alfred.sims.berkeley.edu/privacy.htm

Dos Santos, Brian L., Justifying Investments in New Information Technologies, (7) 4 Journal of Management Information Systems 71-90 (Spring 1991).

Black, F. And Scholes, M. The Pricing of Options and Corporate Liabilities, (81) 3 Journal of Political Economy 637-654 (May/June 1973).

Margrabe, W. The Value of An Option to Exchange One Risky Asset for Another, (33) 1 Journal of Finance 177-186 (March 1978).

 


Self-Regulation on the Electronic Frontier: Implications for Public Policy
 

Mary J. Culnan
School of Business
Georgetown University
Washington, D.C. 20057
culnanm@gunet.georgetown.edu

 

INTRODUCTION
 

I am new to this group, but the first thing I saw was about Ptrax (sic). I just want to know if anyone else has called other database corporations to get their information removed from their database. What are the other companies? Ever since this Ptrax incident companies that I have called are giving me the run around saying that another company is responsible for the database storage. They've been uncooperative about telling me anything. (Posting to FTC Privacy Discussion Group, September 23, 1996)
 

The Internet can support self-regulation in two ways. First, it provides an effective vehicle for firms to implement fair information practices. Web sites allow firms to disclose their practices and provide a name removal or "opt-out" opportunity to a global audience at a nominal cost. The Internet also serves as an effective vehicle to mobilize public opinion and collectively to seek corrective action for situations where industry practices are perceived as being at odds with social norms for acceptable use of personal information. This paper will use three case studies to demonstrate the latter use of the Internet.

The paper will be organized as follows. First the three case studies, Lotus MarketPlace: Households, Marketry and P-TRAK, will be described. Next, the three cases will be analyzed and common themes will be identified. The paper will conclude with the lessons these cases provide for assessing the effectiveness of self-regulation.
 

CASE 1: LOTUS MARKETPLACE: HOUSEHOLDS

In April 1990, Equifax and Lotus Development Corporation jointly announced the Lotus MarketPlace: Households, a CD-ROM mailing list. After delaying the launch date, Lotus and Equifax announced on January 23, 1991 that they were cancelling the product. The press release issued jointly by the two firms said the decision to cancel the product "came after an assessment of the public concerns and misunderstanding of the product, and the substantial, unexpected additional costs required to fully address consumer privacy issues."1 Six months later, Equifax announced that it would discontinue sales of direct marketing lists derived from its consumer credit file.

The database contained both actual and inferred information on 120 million individuals in 80 million households. Names and addresses in MarketPlace: Households came from Equifax's credit report database. The remaining fields were taken from the Equifax Consumer Marketing Database (ECMD). These fields included: geographic information (SMSA, dwelling type and zip were derived from the U.S. Postal Service); gender (inferred from a name table which categorized common first names as male, female or "unknown"); age in ranges (from public records); marital status (inferred from type of credit cards held--a credit report showing only individual accounts would be listed as "single"); income (modeled from self-reported incomes in a computer survey and extrapolated across the entire population with the same zip+4 area); and "neighborhood lifestyle" (each record was assigned to one of 50 Microvision clusters). Individuals could opt out of the database by contacting either Lotus or Equifax, or by registering for the Direct Marketing Association's Mail Preference Service.

The public first became widely aware of MarketPlace: Households after the Wall Street Journal ran a story in November 1990.2 The discussion of the product on the Internet began after this article was posted to at least one public computer conference. Subsequently, the e-mail address for Jim Manzi, the CEO of Lotus, was circulated on the Internet with a call for people seeing the message to e-mail Manzi and express their concerns. It was reported that by mid-January 1991, Lotus had been barraged by some 30,000 individuals who felt the product invaded their privacy and did not want to be included in the database.

CASE 2: MARKETRY

In September 1995, Marketry Inc., a list broker in Bellevue, Washington, announced the availability of a list of 250,000 e-mail addresses compiled from Internet newsgroups and web sites. In October 1995, just one month later, Marketry resigned from managing the controversial file, citing "vociferous" industry reaction.3

The list, which was owned by Response America of Altoona, Pennsylvania, was segmented using eleven "interest" categories: adult, computer, sports, science, education, news, investor, games, entertainment, religion and pets. It was not possible to opt out of the list.

Like MarketPlace: Households, news of the list was posted to a number of public discussion groups on the Internet. Marketry's e-mail address was published in the Electronic Privacy Information Center's EPIC Alert and readers were encouraged to make their views known to the company. The Washington Post also ran a story on the list highlighting the privacy concerns. The launch of the Marketry list coincided with the Direct Marketing Association's annual conference where it was the subject of mostly negative discussion at a session on legal issues related to the information superhighway.

CASE 3: P-TRAK

On June 1, 1996, Lexis-Nexis released P-TRAK, a product for use by attorneys and other Lexis-Nexis subscribers to locate individuals.4 The new file was publicized by a direct marketing campaign to existing Lexis-Nexis subscribers. Today, the product remains on the market in essentially the same form as it was first released.

The file was based on header information from the Trans Union credit report database. At a minimum, each record contained name and current address. Records could also contain alias names (e.g., maiden name), up to two prior addresses, telephone number, date-of-birth (month, year) and social security number. All available fields, including social security number, were displayed for a particular record.

Within a week after releasing P-TRAK, Lexis-Nexis received approximately 200 telephone calls from subscribers expressing concern because P-TRAK displayed the individual's social security number as part of the search results. On June 11, Lexis-Nexis discontinued the display of the social security number and instituted an opt out for P-TRAK; however, a social security number could still be used to retrieve an individual's name and address. By the end of July 1996, telephone calls about P-TRAK had dwindled to nearly zero. In early September however, a message about P-TRAX (sic) was posted to RISKS, a computer discussion group about the risks of computer technology to society. By mid-September, Lexis-Nexis was receiving thousands of telephone calls about P-TRAK as word spread across the Internet. Both the Washington Post and the Wall Street Journal ran articles about the protest. The Washington Post also published an editorial focusing on the public unease caused by "having your every public or commercial transaction on fileretrievable at the touch of a button.5

The conclusion to the P-TRAK case differed from Lotus MarketPlace and Marketry in two ways. First, unlike the first two cases, Lexis-Nexis did not withdraw P-TRAK from the market, nor did they make any additional modifications to the product. Instead, they increased their communications facilities to respond to the public outcry, including accepting opt-out requests from the Internet, either by e-mail or by completing a form on their web site. Second, P-TRAK attracted the attention of Congress. On October 8, 1996, Senators Bryan, Pressler and Hollings wrote to FTC Chairman Robert Pitofsky asking the FTC to conduct an investigation of the compilation, sale and use of electronically transmitted databases that include personal information about private citizens without their knowledge, and to propose any legislation the Commission deemed appropriate given the results of the study.
 

COMMON THEMES FROM THE THREE CASES

The three case studies share common themes related to privacy:

  • The three products represented third party use of personal information. The information in the three products was not collected as the result of a customer relationship between the individuals who complained about the product and any of the three firms. Instead, the information was acquired from another firm, and the customers of the three firms were other companies;
  • Consumers were not aware of the opt-out procedures for the products. While two of the three firms (Equifax/Lotus and Lexis-Nexis) offered an opt-out, there was no feasible method to notify the individuals in the files that their personal information was to be used in this way and to inform them that they could remove their names from the files if they objected. This point is related to the first point. Absent a customer relationship, neither firm was in direct communication with the individuals whose personal information they were marketing; and
  • All three products represented incompatible use of personal information, where information collected for one purpose was used for a different purpose without the individual's knowledge or consent. In the case of Lotus MarketPlace and P-TRAK, the information was collected for credit reporting purposes. In the case of Marketry, individuals disclosed their identities and their interests for the purpose of participating in a public discussion group.

It is also interesting to note that as word about the products spread over the Internet, misinformation about the products was also transmitted in the same way that miscommunication occurs in a parlor game where people whisper a message from person to person in a large circle. The message is invariably distorted when it is whispered again to the originator after making the rounds of the group.
 

DISCUSSION: IMPLICATIONS FOR PUBLIC POLICY

The title of this paper, "Self-regulation on the Electronic Frontier," was chosen intentionally to highlight the ad hoc way that the public concerns with these three products were discussed. The outcomes, which were viewed at the time by consumers as victories, yielded solutions which in retrospect turned out to be temporary and also resulted in a competitive disadvantage for the three firms. In June 1996, a division of Experian (formerly TRW Marketing Services, Inc) announced a Lotus MarketPlace: Households lookalike product, Neighborhood ConnX, to be available in local computer stores beginning third quarter 1996. Other CD-ROM databases are also commercially available. The DM Group of Aurora, Ohio picked up the list of e-mail addresses after Marketry resigned the list. Lexis-Nexis has a number of competitors to P-TRAK, none of which appear to offer a comparable opt-out. Lexis-Nexis is no longer competing on a level playing field because its competitors offer a more complete set of names in their databases. This suggests that the current approach to self-regulation, particularly for information resold by third parties rather than being acquired directly from consumers, is not effective for either consumers or business. Table 1 (which follows the endnotes) summarizes the results of the three case studies.

There are several lessons that can be drawn from the three case studies. Black's Law Dictionary does not contain a definition for self-regulation. It defines regulation broadly as governing according to rule. The lessons of the three case studies suggest first, that for self-regulation to be effective, it needs to be fair--meaning the same rules should apply to all firms in an industry.6 Absent a uniform set of standards (e.g., fair information practices) and effective enforcement mechanisms, there are no incentives for firms to self-regulate if advantages accrue to those who do not play by the rules. Currently neither exist.

Second, information acquired from data compilers or third party resellers instead of being collected directly from individuals appears to present a special challenge for self-regulation. There are no market pressures for the reseller or the compiler to observe fair information practices, given an increasing demand for these types of information services. Because other firms, not consumers, are the reseller's customers, the individuals whose information is being resold cannot vote with their wallets and take their business elsewhere as a means of pressuring the reseller to observe fair information practices. Most information resellers or compilers typically have not established processes for handling communications from people who are not their direct customers but whose personal information is the basis for the resellers' or compilers' products. If they have, public awareness of these procedures is likely to be low. For this type of information use to be fair, consumers should be informed about the firms who resell their personal information, the legitimate uses to which the information will be put, and the procedures the reseller or compiler has implemented to ensure the information is only acquired for legitimate purposes. Consumers should be provided an opportunity to opt-out from the file if appropriate, for example, if the information is to be reused for incompatible purposes. Research has shown repeatedly that people are willing to disclose personal information if the benefits exceed the risks of disclosure and the information will subsequently be used fairly.7

Third, the Internet has the potential to serve as an effective vehicle for educating individuals about the ways their personal information is used so they can make informed choices about the types of use they find acceptable. Trade associations or public interest organizations could post comparative information about information resellers and compilers on the World Wide Web, with a link to these firms' home pages. The table comparing the privacy policies of the four major online service providers which the Center for Democracy and Technology developed as part of its privacy demonstration project (http://www.cdt.org) could serve as a model. Lexis-Nexis has already demonstrated the feasibility of using an online form for opting out of a database with its opt-out and automatic acknowledgment for P-TRAK.

Finally, the Internet is likely to continue to serve as a vehicle for consumers to mobilize when a large segment of the public perceives that industry practices are at variance with social norms. The Internet discussions about Lotus MarketPlace was confined primarily to the computer and the privacy communities. Subsequently, the Internet has gone mainstream and Congress has become wired. Messages about P-TRAK appeared in discussion groups ranging from consumer issues to music to African folklore in addition to electronic communities concerned with privacy. As was described above, the Marketry discussion reached at least one discussion group in Europe.8 In the future we are also likely to see discussion expand greatly beyond our own borders, given the global interest in privacy and the global reach of the Internet.

____________________________________

ENDNOTES

1 Mary J. Culnan and H. Jeff Smith, Lotus MarketPlace: HouseholdsManaging Information Privacy Concerns (A) & (B) (1992), (unpublished teaching case, Georgetown University School of Business).

2 John R. Wilkie, Lotus Product Spurs Fears About Privacy, The Wall Street Journal, November 13, 1990 at B1.

3 Larry Jaffee, List Company resigns E-Mail File, DM News, October 23, 1995 at 1.

4 Much of the information in this section is based on a presentation by Steven Emmert, Corporate Counsel for Lexis-Nexis, Cyberspace Policy Institute, George Washington University, November 19, 1996.

5 Awash in Information, The Washington Post, September 28, 1996 at A16.

6 It is interesting to note that Marketry was not a member of the Direct Marketing association when it managed the list of e-mail addresses, and was therefore technically exempt from observing its ethical guidelines.

7 Mary J. Culnan and Pamela K. Armstrong, Information Privacy Concerns & Procedural Fairness: An Empirical Investigation (1996) (unpublished working paper, Georgetown University School of Business).

8 The online discussion of P-TRAK and Marketry may be tracked using DEJANEWS (http:// www. dejanews. com).

 


Table 1: Summary of the Three Case Studies





  Lotus MarketPlace: Households Marketry P-TRAK
Product CD-ROM marketing database E-Mail addresses segmented by interest Locator service on LEXIS-NEXIS
Date 1990-1991 1995 1996
Data Source Credit Reports and public records Harvested from the Internet Credit Report Headers
Direct Relationship with Consumer? No No No
Privacy Problems


 
1) Third-party acquisition of data

2) "Stealth" opt-out

3) Incompatible use

4) Third-party acquisition of data

5) No opt-out

6) Incompatible use

7) Third-party acquisition of data

8) "Stealth" opt-out

9) Incompatible use

Outcome
 
Product canceled Resigned management of list Congress requested FTC study
Competitive Responses Lookalike products Competitor picked up list Competitors' files are more complete (no opt-out)
Public Pressure via: E-mail, negative press E-mail, informal pressure from industry, negative press E-mail, negative press


 

 


"Whatever Works" The American Public's Attitudes Toward Regulation
and Self-Regulation on Consumer Privacy Issues

 

Alan F. Westin
Professor of Public Law and Government, Columbia University,
and Publisher, Privacy & American Business
 

BACKGROUND
 

NTIA invited Privacy and American Business and Dr. Alan F. Westin to submit a paper on "The Public's View of When Privacy Self-Regulation Is Appropriate." This is part of NTIA's solicitation of expert commentaries on the pros and cons of industry self- regulation in the uses of "telecommunications- related personal information," particularly in the online and Internet environments.
 

IS "PUBLIC OPINION" A FEASIBLE AND USEFUL INPUT?

Discerning and interpreting "the public's view" on the regulation-to-self-regulation continuum in the privacy area is not an easy task. For example, many interest-group spokespersons claim to know "instinctively" how the public feels about privacy issues; they generally assume that public majorities share their own values and policy preferences, or would do so if only properly informed. Still other experts believe that the public really has no coherent or consistent "views" on how regulation or self-regulation does or should function in the privacy area; they feel that trying to map public views on this matter is at best a waste of time and energy, and at worst a diversion from good policy development. Finally, some commentators dismiss the body of survey research that has been done over the past decade on privacy protection as either unsophisticated or self-serving, and would expect NTIA to give such input little credence.

Recognizing that we start in a contentious setting, we do believe that a careful exploration of public views on privacy self-regulation is a useful input to the NTIA inquiry, if used prudently and with a sensible awareness of both the strengths and the limitations of public-opinion analysis.

OVERALL PUBLIC ATTITUDES TOWARD PRIVACY
 

The American public continues in the l990's to register strong concerns about threats to their personal privacy from both government and business, and this concern is still rising.

89% of the public said in late 1996 that they are concerned about threats to their personal privacy in America today, up from 82% in 1995. Of the concerned, 55.5% said in 1996 they were now "very concerned," up 8% from 1995.

72% say they have read or heard a great deal or a moderate amount about invasion of privacy in the past year (1995). However, only a quarter of the public (25% in 1991 and 1995) say that they have personally been the victim of what they felt was an invasion of their privacy.

While a narrow majority of Americans worry primarily about government invasions of privacy (52% in 1994 and 51% in 1995), a substantial minority express primary concern about activities of business (40% in 1994 and 43% in 1995). Approximately two-thirds of the public disagree with the statement that the Federal Government since Watergate has not been seriously invading people's privacy (64% in 1990 and 62% in 1995).

A rising large percentage of the public feels that consumers have "lost all control over how personal information about them is circulated and used by companies," (from 71% in 1990 to 80% in 1995 and 83% in 1996). There has also been a major increase in the percentage of people who say they have refused to give information to a business or company because they thought it wasn't needed or was too personal (from 42% in 1990 to 59% in 1995).

When people nominate the most important issues facing the nation or that the Federal Government should be addressing, no survey in the 1990's (by Harris or any other survey organization) has found privacy to be mentioned in the top ten. In 1995, when the Equifax survey gave respondents a list of nine consumer issues to rate in importance, privacy finished exactly in the middle (fifth) in terms of being "very important," at 61%. Rated higher in being very important were controlling the cost of medical insurance (84%); staying out of excessive debt (83%); reducing insurance fraud (74%); and controlling false advertising (71%).

Throughout the 1990's, a majority of the public (54% in 1995) has said that they do not believe their rights to privacy are adequately protected today by law or business practice.

Optimism is not the outlook that most Americans hold for privacy protection Eighty-three percent in 1995 say protection of privacy in the year 2,000 will either remain the same (42%), which they said was weak, or get worse (41%).
 

When it comes to specific areas of consumer privacy, a majority of the public looks at business information practices to make two judgments: Is the information sought or collected relevant and socially-acceptable to use for this purpose; and are basic fair information practices being observed.

In each of six Equifax-Harris surveys, detailed questions were presented asking consumers how they felt about information practices in major consumer areas. These have included credit reporting, financial services, underwriting for life and property insurance, employment, telecommunications, medical records and health care, direct marketing, and similar matters.

The general pattern of responses was striking and consistent:

When the Equifax surveys give respondents lists of types of information that businesses or employers could ask for--to decide whether consumers or job applicants receive benefits or opportunities--the public applies pretty sophisticated notions of decisional relevance. For example, strong majorities accept the relevance of payment histories, bankruptcy status, litigation pending, and similar matters when credit grantors are asked to make loans or issue credit cards. Job relevant criteria are approved and non-job-relevant ones are disapproved, and so on.

The public also holds clear notions as to the social propriety of asking for certain information even if it may be highly relevant. This often reflects changing national standards as to what kinds of personal information the public in the l990's thinks it is acceptable for businesses or employers to ask about and use in making particular decisions, such as gender, race, lifestyle, political activity, associational affiliations, sexual preference, etc.

If information is considered relevant and proper to use, the public then looks to see whether what have come to be known as fair information practices standards and procedures are being observed by businesses in specific contexts. If they are, a majority of the public generally expresses comfort with the organization's information practices.

The key elements the survey respondents consistently rate as essential are:

  • notice to the consumer of what information is being collected and how it will be used;
  • limitation of uses to the broad area of consumer activity the individual is knowingly involved in;
  • choices offered to consumers as to any additional uses to be made of their personal information by the collecting organization or by furnishing it to others;
  • opportunities to examine and, where needed, contest and correct the contents of records compiled about the individual; and
  • adoption of effective rules and procedures for assuring the confidentiality and security of the personal data entrusted to the collecting organization.

In a process shown to operate in all these Equifax surveys, a strong majority concern or even disapproval that is registered by respondents over specific business or government information practices presented to them will shift to strong majority approval when the survey presents key fair information practices and asks--if these were observed (and sometimes, if these were written into law)--whether the information practices would then be acceptable to respondents.

The movement of majorities from initial registered concern to majority approval--if safeguards are adopted--shows that privacy is not seen by the large majority of the American public as an absolute, in the sense of expecting businesses that provide services to consumers or government's social programs to operate without access to relevant and socially-appropriate personal information. Rather, the judgment process tested in the Equifax surveys demonstrates that, to most Americans, the key issue is almost always a matter of defining, adopting, and observing reasonable safeguards to avoid or limit present or potential abuses.
 

Surveys establish that the driving factors behind privacy attitudes, both in general and in specific consumer areas, are the individual's level of distrust in institutions and fears of technology abuse.

The Harris Distrust Index combines measurement of distrust in institutions (government, voting, and business) with fear that technology is almost out of control.

Harris Privacy Surveys since 1978, and throughout the Equifax series in the 90's, have found that a respondent's score on the Distrust Index correlates with a majority of that respondent's positions on privacy in general and the industry-specific questions on each survey. The higher the Distrust Score, the more a respondent will express concern about threats to privacy, believe that consumers have lost all control over uses of their information by business, reject the relevance and propriety of information sought in particular situations, call for legislation to forbid various information practices, etc.

In 1995, the American public divided as follows on the Distrust Index:

  • High (distrustful on 3-4 questions) 29%
  • Medium (distrustful on 2 questions) 42%
  • Low (distrustful on 1 question) 23%
  • Not (no distrustful answers) 6%

The 1995 score of 71%, of the American public registering High or Medium Distrust is the highest those levels have ever been. And, in 13 of the 1995 survey's 16 questions asking about general privacy concerns and measuring specific privacy attitudes, the strongest privacy positions were registered by the High Distrustful respondents; the next strongest by the Medium Distrustful; and so on through the Low to Not Distrustful. In survey terms, this is confirmation of the direct relationship between the Distrust orientation and positions on privacy issues.

Since not just the Equifax surveys but a barrage of national surveys over the past two decades confirm that a majority of the American public has deep institutional distrust and technology fears, it is highly likely that the public's strong privacy concerns will carry forward into the late 1990's. This means that it will take firm, explicit, and publicly-credible privacy-protection measures--not just promises or good intentions by business and government--to counter the fallout in the privacy field from the American public's larger negative social attitudes.
 

The division of the American public into three basic clusters--Privacy Fundamentalists, Privacy Pragmatists, and the Privacy Unconcerned--continues to be a stable segmentation of public approaches to privacy.

In 1990, 1991, and 1995, analysis of the samples' responses to a set of representative privacy questions showed that the American public divides into three cohesive camps on privacy issues as a whole and consumer privacy issues in particular.

The three divisions the survey data identify are as follows:

Privacy Fundamentalists (about 25%). This group sees privacy as an especially high value, rejects the claims of many organizations to need or be entitled to get personal information for their business or governmental programs, thinks more individuals should refuse to give out information they are asked for, and favors enactment of strong federal and state laws to secure privacy rights and control organizational discretion. Privacy Fundamentalists score at the High level in the Harris Distrust Index.

Privacy Pragmatists (about 55%). This group weighs the value, both to them and to society, of various business or government programs calling for personal information, examines the relevance and social propriety of the information that is sought, looks to see whether fair information practices are being widely enough observed, and then decides whether they will agree or disagree with specific information activities--with their trust in the particular industry or company involved a critical decisional factor. The Pragmatists favor voluntary standards over legislation and government enforcement but they will back legislation when they think not enough is being done--or meaningfully done--by voluntary means. Privacy Pragmatists generally score at the Medium and some High levels in Distrust.

Privacy Unconcerned (about 20%). This group doesn't know what the "privacy fuss" is all about, supports the benefits of most organizational programs over warnings about privacy abuse, has little problem with supplying their personal information to government authorities or businesses, and sees no need for creating another government bureaucracy to protect someone's privacy. Not surprisingly, the Privacy Unconcerned score at the Low to No Distrust levels on the distrust Index.

In the 1995 Equifax-Harris survey, this three-fold division was present in the public's positions on 13 of the 16 privacy-attitude questions. On each of those questions, the strongest privacy concerns and orientations were held by the Privacy Fundamentalists, middle positions were taken by the Pragamatists, and the least concern or disapproval was registered by the Privacy Unconcerned.
 

VOLUNTARY STANDARDS, GOVERNMENT REGULATION, AND INDIVIDUAL CHOICES

Though the American public clearly wants more effective policies and practices to strengthen consumer privacy rights, just what does the public think should be done and by whom? To test those issues, Equifax surveys over the past seven years have asked a variety of questions:

Does the public favor passing state or federal legislation to define and enforce consumer privacy rights in particular sectors, when the public feels that organizational practices and any existing laws are presently inadequate? The answer is Yes. In the case of medical records and health information, for example, the public in 1993 strongly supported new health privacy legislation at the federal level. On the other hand, majorities rejected the need to forbid employers to conduct monitoring of workers for quality and observance of rules and laws.

Does the public favor creating a government commission to study how technologies are being applied in a particular area of personal information collection, and make recommendations to protect privacy and due process in that setting? Definitely. A 1995 Harris study for the Center for Social and Legal Research found that 85% of the public felt it was "important" for a government commission to be appointed "to examine how genetic tests are developing and to make recommendations for policies or laws to protect privacy of genetic test information and control the uses of genetic test results." Forty-eight percent felt this was "very" important.

Does the public feel that a government privacy agency should be created to enforce privacy protections in a particular sector where no such agency exists today. The answer is again, Yes. For example, a federal agency with regulatory authority was strongly favored by the public in 1993 to help protect health- information privacy.

In general, do consumers prefer good voluntary privacy policies by business (if those are provided) over the enactment of government regulation? Yes, says the public. Majorities at 72% in 1995 said they favor the voluntary approach when this is actively pursued by the private sector.

Finally, does the public feel that some sort of federal privacy commission or agency, either with regulatory powers or as an advisory body, should be added to existing industry-based federal agencies, such as the Federal Communications Commission and Federal Trade Commission? We did not have a clear answer on that prior to 1996. When such a question was posed on the Equifax 1990 survey, it offered three choices--a federal regulatory agency, a federal advisory agency, and improving existing policies--and the public in 1990 divided about equally among those three alternatives.

Given the debate over whether the U.S. would be considered by the European Union to have an "adequate" data protection regime unless there was a federal regulatory agency with powers over the entire private sector, in the European model, the Equifax-Harris 1996 survey posed the following question:

The present system in the U.S. for protecting the confidentiality of consumer information used by business combines three main controls: voluntary privacy practices adopted by companies, individual lawsuits and court decisions, and federal and state laws in specific industries.

Some experts feel that Congress should create a permanent federal government privacy commission, as some European countries have done. This commission would examine new technology development and could issue and enforce privacy regulations governing all businesses in the U.S.

Other experts believe the present system is flexible enough to apply those consumer privacy rights that the American public wants to have protected, and that creating a federal commission gives too much authority to the federal government.

Which of these choices do you think is best for the U.S.?

The two answers, rotated to avoid bias, were: "creating a federal government privacy commission" or "using the present system to protect consumer privacy rights."

In addition, to make sure that posing all the specific survey questions to respondents about business information practices, privacy issues, and potential privacy policies or laws did not exert an imprinting effect on respondents, the question about a federal privacy agency was presented to half the sample near the beginning of the survey and to the other half at the end of the survey, just before the demographic queries.

A solid two-thirds (67%) of the combined total sample chose "staying with the present system of privacy protection" over "creating a federal government privacy commission." And, respondents asked the question at the end of the survey--after being sensitized to privacy issues by about 18 minutes of questioning--chose staying with the present system by 70%, compared to the front-end respondents' 64% choice of that position.

Why do less than one in three Americans (28%) think that a federal privacy agency "is best for the U.S." today? And, why is this true among the groups that regularly show up in the Equifax surveys as the most concerned about threats to privacy, in general and in particular sectors--such as liberals; computer and on-line service users; persons with low incomes and education; minorities; etc.? Even among these groups, only 37% or less of their members believe a federal privacy agency with regulatory power would be the right step for the nation to take.

The prime explanation for this population-wide view seems to be the application to the consumer privacy area of a set of powerful political and cultural attitudes of Americans that go back to the Founding Fathers but are still deeply held in the computer age. Many of these underlying attitudes have been tested and reflected in the Equifax privacy surveys since 1990. Nine basic orientations are involved:

  • The basic distrust of government and emphasis on individual rights and choices, a theme that resonates loudly in the 1990's;
  • The importance of the First, Fourth, and Fifth Amendments in our Bill of Rights in framing the ways we define and implement privacy rights and information-handling, and how our courts balance those rights with other compelling social interests;
  • The strong states-rights component of our federal system, which sees state experimentation as a prime social-policy instrument and usually views federal supervision as justified only when most states fail to act and national uniformity is absolutely necessary;
  • The high status given to individually-generated litigation and court rulings as a powerful remedy for perceived harm, especially through interest-group sponsorship and the financing of "rights litigation;"
  • Our selection of industry sectors for concrete and tailored legislative action and area-expert regulatory agency supervision (on privacy and many other matters), rather than adopting multi-industry or nationwide interventions;
  • A major popular preference for voluntary privacy policies and actions by business and non-profit organizations over legislative solutions, unless such voluntary actions are seen as insufficient, or in need of legal reinforcement;
  • The powerful role of the media in the U.S. in exposing misconduct or abuses by businesses or government, and the actions that business and government leaders take to either avoid media thunderbolts or to collect mistakes when they become public embarrassments;
  • The general preference of Americans for market-based solutions and private choices by individual consumers about alternative privacy policies, wherever these are meaningfully afforded; and
  • A general sense that if technological methods can be found to let people set their own different boundaries and balances of privacy, this would be a preferred solution, given the wide variation in privacy concerns and preferences from individual to individual that survey research shows to be the continuing situation in the U.S.

It should be noted that the 1996 question did not ask respondents whether a temporary federal privacy study commission (as we had in 1975-77) or an executive-branch federal privacy body limited to research and advisory missions would be viewed as a desirable or necessary step in the late 1990's. Those represent potential measures that it would be useful for future privacy surveys to test.
 

THE 1997 PRIVACY & AMERICA BUSINESS SURVEY ON ONLINE PRIVACY

The latest and most important addition to our public opinion resources is "Commerce, Communication and Privacy Online: A National Survey of Computer Users." This detailed, 25-minute telephone survey of 1,000 adults using computers at home, work, school, or any other place was conducted in April, 1997 by Louis Harris & Associates and Dr. Alan F. Westin for Privacy & American Business. Its results were released publicly on June 11, 1997 at the Federal Trade Commission's Public Workshop on Consumer Information Privacy, in Washington, D.C. The survey was sponsored by 10 companies and industry associations, with advisory input from consumer and public interest groups, academic experts, and federal government staffs concerned with consumer protection, telecommunications, and commerce.

The survey's respondents were a representative national sample of Americans 18 and over who currently use computers; this represents about 100 million persons out of the approximately 190 million adults in a total national sample. Of these computer users, 42% (representing about 42 million adults) say they are accessing the Internet once a month or more; 33% (representing about 33 million adults) say they use online services; and 49% (representing about 49 million adults using computers) say they are neither online nor using the Internet.

Among the major findings of the P&AB study were:

  • Only a very small percentage (5% of Net users and 7% of online service users) experienced what they regard as an invasion of their privacy online, as compared to 25-35% of the general public who have experienced privacy invasions in the offline world.
  • More than half (53% of Internet users and 57% of online users) are concerned that information about which sites they visit will be available without their consent and 59% of Internet users who send and receive email are concerned that the content of what they communicate will be obtained by a third party.
  • Computer users are especially concerned about protecting children's personal information online. Fifty-nine percent of computer users say it is not acceptable to collect personally-identified information from children for site-use statistics; 58% not acceptable for product improvement; 73% not acceptable to acquire at the time of purchase or registration at a site; and 90% not acceptable to sell to other marketers.
  • A majority (52%) of computer users not yet online or using the Internet say that privacy protection is the most important factor that would influence their decision to go online.

The entire respondent group was asked several questions relating to laws and government regulation. One question asked whether companies that collect information from children should be legally liable if they violate their stated policies as to how that information will be used. Ninety-four percent of respondents felt they should be held legally liable.

When asked to agree or disagree with the statement used earlier on Harris-Westin privacy surveys--"if companies and industry associations adopt good voluntary privacy policies, that would be better than enacting government regulation, in this country--" 70% of these survey respondents agreed.

Turning specifically to online privacy, the survey asked:

Here are three ways that the government could approach Internet privacy issues. Which ONE of these three do you think would be best at this stage of Internet development?" The three statements, which were rotated to prevent any bias in order of presentation, were:

  • Government should let groups develop voluntary privacy standards, but not take any action now unless real problems arise.
  • Government should recommend privacy standards for the Internet but not pass laws at this time.
  • Government should pass laws now for how personal information can be collected and used on the Internet.

Fifty-eight percent of respondents favored government passing laws now; 24% supported government recommending privacy standards but not legislating them; and 15% favored letting groups develop voluntary privacy standards and government taking action only if real problems arise.

Among adults actually using the Internet, only 47% favored government passing laws now. Those using only online services favored legislation at 56% and computer users who are neither online nor on the Net supported legislation at 65%.

Several important points about the Internet-privacy question deserve mention.

It was placed at the end of the survey, after almost 100 items had explored various aspects of respondents' knowledge, experiences, attitudes, and policy preferences about online and Internet uses and privacy matters, including the questions about protecting children using the Net. This process clearly sensitized respondents to privacy concerns.

The question gave no specifics as to what kind of laws would be passed and what their operative definitions would be; whether this would be federal or state legislation; what kind of penalties or damages would be installed; whether there would be any agency supervision or regulatory process designated or individual litigation would be the remedy; and various similar matters which could be expected to have major effects on how the public would evaluate any actual legislation introduced.

The survey found that 71% of respondents online were not aware of their services' information policies; that majorities of online and Net users were not aware of software tools to control unwanted advertising email or access to disfavored web sites; and that most visitors to web sites were not aware of the policies those sites followed in collecting visitors' personal information.

The survey found low confidence by the total respondents in the way that online services, direct Internet access providers, and companies offering products on the Internet handle "the personal or confidential information people give them," with the lowest confidence expressed for companies marketing to children on the Net. Much higher confidence was expressed in banks, employers, and hospitals, for example.

The 58% support for government legislation on Internet privacy can be seen as an example of the support for "sectoral privacy legislation" that we documented earlier in this paper, and is not inconsistent with the overall public's lack of support for creating a federal regulatory agency with authority over the entire business world.

The finding also can be seen as expressing a judgment that--as of 1997--computer users do not see the kinds of "good voluntary privacy policies" being promulgated as yet by companies and industry associations on the Internet, or perhaps a feeling that it might take a structure of legal rules to make it possible for good privacy policies to be followed by companies managing or operating on the Net.

In terms of the historic regulation versus self-regulation tension in American social policy, I read this 1997 result favoring regulation for the Internet as a very early--and accurate--perception by computer users (and probably the public not using computers) that solid information-policy notices by online services and website operators, consumer consent mechanisms, and software tools for exercising user controls over spamming and unwanted communications are simply not yet in place. Nor does the confidence felt about online firms lead a majority of computer users to feel today that industry and its public-interest-group colleagues in voluntary-privacy-policies should be given deference in advance of action.

At the same time, it seems clear that the leading federal regulatory and executive agencies properly assessing both the concerns and the realities of online privacy operations do not have a template at hand for regulating privacy online. Indeed, most have expressed a desire to see industry, public-interest groups, and technologists develop standards and procedures which--some time later, after experience accumulates--might become an empirical basis for legislative action, if that became needed to control non-compliant or "outlaw" behavior.

It will therefore be important to revisit the feelings of the nation's wired population--and the general public--in the next 2-3 years, when many major industry actions, user-control programs, and individual-choice mechanisms have had a chance to be installed and tested, and their scope and impact felt.
 

CONCLUSIONS

Given the elements of our social, political, and legal culture noted above, and the basically pragmatic orientation of a majority of the American public on the privacy issues per se, it seems fair to conclude that the American attitude toward self-regulation or regulation along the Information Superhighway and its Internet high wire is basically--"whatever works!"

The 1997 Privacy & American Business online privacy survey shows that computer users want meaningful privacy protection for their personal information as they communicate in the online world, that they do not see this being provided as yet voluntarily, and that this leads them--at this moment--to support the enactment of laws. If the forces supporting self-regulation are to change that orientation, it will take powerful deeds of policy and technology, amply publicized and demonstrated to be effective.

________________________________

SOURCES

The sources for this paper are representative opinion surveys of the United States adult general public. The citations are to the published reports on each survey, with the year given as of the report's publication. While most of these had the interviews done during the same year, several had their field work conducted one or even two years before publication of the report. Except where noted below, all of these surveys were conducted by telephone.

1 The Dimensions of Privacy, Louis Harris & Associates and Dr. Alan F. Westin, for Sentry Insurance; national public sample, 2,131 adults; 1979. (In-person interviews).

2 The Equifax Report on Consumers in the Information Age, Louis Harris & Associates and Dr. Alan F. Westin, for Equifax Inc.; national public sample, 2,254 adults; 1990.

3 Harris-Equifax Consumer Privacy Survey, l991, Louis Harris & Associates and Dr. Alan F. Westin, for Equifax Inc.; national public sample, 1255 adults; 1991.

4 Harris-Equifax Consumer Privacy Survey, 1992, Louis Harris & Associates and Dr. Alan F. Westin, for Equifax Inc.; national public sample, 1,254 adults; 1992.

5 Health Information Privacy Survey, 1993, Louis Harris & Associates and Dr. Alan F. Westin, for Equifax Inc.; national public sample; 1,000 adults; 1993.

6 Equifax-Harris Consumer Privacy Survey, 1994, Louis Harris & Associates and Dr. Alan F. Westin, 1,005 adults; 1994.

7 Workplace Health and Privacy Issues: A Survey of Private Sector Employees and Leaders, Louis Harris & Associates and Dr. Alan F. Westin, for the Educational Film Center; sample of 1,000 employees working in private-sector companies with 15 or more employees; 1994.

8 Consumers and Credit Reporting, 1994, Louis Harris & Associates and Dr. Alan F. Westin, for MasterCard International and Visa U.S.A.; national public sample, 1,001 adults; 1994.

9 Interactive Services, Consumers, and Privacy, Louis Harris & Associates and Dr. Alan F. Westin, for Privacy & American Business, sponsored by Bell Atlantic, Citicorp, and U.S. WEST; national public sample; 1,000 adults; 1994.

10 Equifax-Harris Mid-Decade Consumer Privacy Survey, Louis Harris & Associates and Dr. Alan F. Westin, for Equifax Inc.; national public sample, 1,006 adults; 1995.

11 Consumer Privacy Issues, Louis Harris and Associates and Dr. Alan F. Westin, for Privacy & American Business; national public sample, 1,000 adults, 1995.

12 Genetic Testing and Privacy, Louis Harris & Associates and Dr. Alan F. Westin, for the Center for Social and Legal Research; national public sample, 1,002 adults; 1995.

13 l996 Equifax-Harris Consumer Privacy Survey, Louis Harris & Associate and Dr. Alan F. Westin, for Equifax Inc.; national public sample, 1,005 adults; 1996.

14 Public Attitudes Toward Local Telephone Company Use of CPNI, Opinion Research Corporation and Dr. Alan F. Westin, for Pacific Telesis; national public sample, 1,000 adults; 1996.

15 Commerce, Communications, and Privacy Online, Louis Harris & Associates and Dr. Alan F. Westin, for Privacy & American Business, national sample of computer users, 1009 respondents; 1997.

 



The Limits and the Necessity of Self-Regulation: The Case for Both



Deidre K. Mulligan
Staff Counsel
The Center for Democracy and Technology

Janlori Goldman
Deputy Director
The Center for Democracy and Technology
 

The Center for Democracy and Technology (CDT) is pleased to respond to the National Telecommunications and Information Administration's letter of November 14, 1996, requesting that CDT submit a paper addressing the "Limits and the Necessity of Self-regulation" in the privacy policy arena. The Center for Democracy and Technology is a nonprofit, 501(c)3 organization working to preserve and enhance civil liberties on the Internet and in other interactive communications media. Having commented upon the Information Infrastructure Task Force's Principles for Providing and Using Personal Information and the NTIA's report, "Privacy and the National Information Infrastructure: Safeguarding Telecommunications-Related Personal Information," CDT is pleased to have the opportunity to continue this important dialogue about designing and implementing privacy safeguards for interactive communications media.
 

OVERVIEW

There is growing consensus that interactive communications media such as the Internet hold great potential for enhancing democratic values and supporting the full realization of individual freedoms. But this potential will only be realized if policies are put in place that support and encourage the development of technologies that give individuals control over both the ideas and beliefs to which they are exposed, and the collection, use and disclosure of their personal information. It is unclear whether these two policy goals will require similar or disparate actions by the government and private sectors. While supporting the First Amendment on the Internet demands a hands-off policy of no regulation, advancing privacy on the Internet requires the establishment of affirmative public policy that gives people notice of information practices and the ability to make meaningful decisions regarding the flow of personal information. The regulatory model that will best move us toward privacy solutions for the Internet is debatable.

It is broadly recognized that the First Amendment potential of the Internet will be best actualized through policies that limit government control over content. Civil libertarians, industry, and most recently a panel of three federal judges in Philadelphia, believe that the decentralized, open nature of the Internet, coupled with tools that allow users to control information, will best achieve the First Amendment goals of abundance and diversity while allowing individuals to limit their, and their children's, exposure to unacceptable material. Through the development of filtering and blocking devices that empower individuals to control the inflow of information, the Internet can give true meaning to the core First Amendment principle that individuals should determine the ideas and beliefs deserving of expression, consideration, and adherence.1 For as Judge Dazell concluded in his opinion finding the Communications Decency Act unconstitutional:

It is no exaggeration to conclude that the Internet has achieved, and continues to achieve, the most participatory marketplace of mass speech that this country-- and indeed the world--has yet seen. the Internet deserves the broadest possible protection from government-imposed, content-based regulation.

Unlike the First Amendment area, the question of how best to achieve a strong, effective privacy regime on the Internet remains unanswered. In fact, at this moment the impact of the Digital Age on individual privacy is uncertain and presents a number of questions: How can we ensure that the Digital Age offers a renewed opportunity for privacy? What policies and actions will best support individual privacy on-line. Can self- regulation adequately protect privacy on the Internet? Will the development of technologies that empower individuals to control the collection and use of personal information and communications--such as encryption, and anonymous remailers, web browsers and payment systems--coupled with self-regulatory policies that mandate notice and choice be adequate? Or will the protection of privacy online require a new regulatory regime for the Internet? How we can best ensure that the architecture of the Internet is designed to advance individual privacy by facilitating individual control over personal information is yet to be decided.

The goal of this paper is to examine both the necessity and the limits of self-regulation in the privacy arena. Through an examination of industry-supported privacy policy and the strengths and shortcomings of existing privacy laws and self-regulatory systems, this paper will attempt to illustrate the necessity of self-regulation--as both a model for future policy and a pragmatic solution in the absence of legal safeguards--and its very real limitations.
 

SELF-REGULATION

The Debate

Debate over the capacity of self-regulation and market forces to adequately address privacy concerns continues to rage in the privacy and consumer protection arenas. Advocates often take the position that self-regulation is inadequate due to both a lack of enforcement and the absence of legal redress to harmed individuals. Industry tends to strongly favor self-regulation, stating that it results in workable, market-based solutions that respond directly to consumer's needs while placing minimal burdens on affected companies.2 These positions, while in tension, are not mutually exclusive, and in the past both have accurately described the self-regulatory process. A closer look at the enactment of federal privacy legislation over the years reveals a story much more complex and sophisticated than these standard position statements portray.

Historical Relation Between Self-regulation and Legislation

Industry positions on the desirability of legislative or regulatory privacy solutions have varied. While industry has frequently opposed legislative efforts, at times it has vigorously supported, and even actively pursued, privacy legislation where it believed a law was necessary to build public trust and confidence in a particular industry or technology. The majority of industry-supported privacy efforts have resulted in legislation that limits the ability of government--particularly law enforcement--to gain access to information about individuals. However, a number of industry-supported privacy laws have actually placed limits on the private sector's use of personal information. In such instances good industry actors have led the way, crafting self-regulatory policies. These policies are the prototype for subsequent legislation supported by self-regulated players who, for reasons of public trust, liability, and/or government concern want to bind bad industry actors.

It is instructive to examine the factors that have led industry and the public interest community to join together in support of privacy legislation aimed at regulating both government and private sector use of personal information.

The Electronic Communications Privacy Act of 1986 (ECPA), which updated the 1968 Wiretap Act, was the result of a collaborative public interest/private sector effort.3 Industry feared that without legal protection against eavesdropping and interception, consumers would be reluctant to use emerging electronic media, such as cellular phones and email, to communicate. The resulting law extended legal protection akin to that provided First Class mail, and was developed and supported by a diverse coalition of business, civil liberties, and consumer advocates who understood that consumers would be unwilling to fully embrace electronic mail and other new technologies without strong privacy protections.

Similarly, 1995 amendments to ECPA crafted privacy protections for transactional information that was content-like in its ability to reveal facts about a person's life.4 In these instances, developing and enacting a legislative privacy regime was viewed by the business community as a necessary component of creating and supporting a flourishing market for their products. The nexus between privacy protection and business necessity resulted in a diverse public interest/industry coalition supporting increased protections for transactional data.
 

The Cable Communications Privacy Act of 1984 and the Video Privacy Protection Act of 1988 reflect a similar coalescing of interests.5 Enacted within a couple of years of each other, both laws resulted from the affected industry's realization that a lack of assurance that viewing preferences were protected from prying eyes, would have a chilling effect on consumers' viewing and renting habits. The revelation in a Washington, DC weekly paper that a reporter--or anyone for that matter--could walk in off the street and discover Supreme Court nominee Judge Bork's taste in movies provided privacy advocates with the perfect story to gain Congress' attention. Privacy advocates arrived on the Hill with Erols, the Video Software Dealer's Association, the Direct Marketing Association, and others who realized that the viability of their businesses depended on consumer trust and confidence that video rental lists were safeguarded by strong legal restrictions on government and private sector access.

In other instances, industry has been moved to support privacy legislation in the wake of public revelations of bad practices or a particularly compelling horror story. The Fair Credit Reporting Act of 1970 (FCRA) was initially drafted and supported by the credit reporting industry in response to congressional hearings which revealed widespread misuse of credit information and an alarming rate of inaccuracies in credit reports. An enraged Congress, with the support of privacy and consumer organizations, indicated a commitment to passing a law regulating the use of consumer credit information. Realizing that legislation was inevitable, the industry set about crafting a policy that they could support. The Driver's Privacy Protection Act of 1994 was largely triggered by the murder of actress Rebecca Shaffer, and eventually garnered the support of the majority of the affected industries.6 Through information in her driver's license file at the department of motor vehicles, Shaffer's stalker was able to learn her whereabouts.

A recent example of the relation between self-regulation and legislation comes to us from Canada. In May, two Ministers in the Canadian government announced their intention to enact a national law to protect privacy online based upon self-regulatory principles that were adopted by the Canadian Standards Association early in the year. John Gustavson, president and CEO of the Canadian Direct Marketing Association (CDMA) stated that, "CDMA believes legislation is the most effective means of ensuring all private sector organizations adhere to the same basic set of rules in handling information."7 The interest in creating uniformity and engendering consumer trust and confidence in an emerging technology brought industry to craft self-regulatory policy and eventually back legislation based upon its framework.

This brief review of federal privacy legislation indicates that historically, for privacy legislation to garner the support of industry it must either implement accepted practices within industry-- binding bad actors to the rules being followed by industry leaders--or be critically tied to the viability of a business service or product as with the Video Privacy Protection Act and the Electronic Communications Privacy Act.
 

The Limits of Self-regulation

Recognizing the role that self-regulation has played--both as a test-bed for policy and a gap -filler in the absence of law--it is important to also examine its limitations. Historically, the two primary shortcomings of industry self-regulation in the privacy are: 1) the lack of oversight and enforcement; and, 2) the absence of legal redress to harmed individuals.8

Oversight and Enforcement. Oversight and enforcement often have been missing components of industry self-regulation. Without a strong commitment to ensuring adherence to policies, self- regulation is doomed to be inadequate--and will appear to the public, policy-makers, and advocates as window-dressing designed to squelch needed regulatory activity.9 For example, while many trade associations put forth model policies, few have the ability to enforce member companies adherence. Often it is precisely this lack of oversight and enforcement power that eventually drives good-industry actors to seek legislation codifying self-regulatory principles in an effort to bind bad- industry actors who are tarnishing the reputation of the industry as a whole. Without a strong commitment to oversight and enforcement of industry supported policy, self-regulation will ultimately fail.

Legal Redress. Similarly, the absence of effective and responsive legal redress to harmed individuals is a recurring problem with self- regulatory solutions. Industry generated policies rarely offer consumers meaningful relief in instances of abuse. Without meaningful opportunity to have grievances addressed, and to be compensated for breaches of policy, consumers will find policies--whether they be self-regulatory or legislative--sorely lacking.

The Limits of Existing Law

Even acknowledging the number of instances where diverse interests have successfully supported legislative privacy solutions, the fact remains that large quantities of personal information are unprotected by privacy rules and vulnerable to misuse and abuse. The patchwork quilt of sector by sector privacy protection in the US is comprised of horror-story-inspired legislation that often provides inadequate privacy protections and rarely gives individuals any direct say in how information about them is collected, used and disclosed. For example, the Right to Financial Privacy Act10 (RFPA)--enacted the year following a Supreme Court ruling that one has no constitutionally protected privacy interest in personal records held by a bank,11--only limits government access to personal bank records. Under the RFPA the private sector's use of personal financial information is unfettered. The Fair Credit Reporting Act, while establishing some limits on the private sector's use of credit information, does so by legislating so-called"permissible purposes" for which industry can use and disclose credit information rather than crafting a consent mechanism that would allow the individual to be the arbiter of access to her own information.12 Finally, there are crucial areas of personal information that have little if any federal privacy protection, such as personal health and genetic information. Even where there has been an attempt to codify fair information practices through federal statutes, the results have generally fallen far short of the desired goal of privacy advocates, which is to have individuals control the collection, use, and disclosure of personal information.13

This is not to underestimate the importance of hard fought battles to craft statutory privacy protections for personal information. Existing privacy laws in areas such as banking, cable, credit, educational and video records set important limits on the use and disclosure of personal information. However, there is not a statute on the books that gives the individual simple, meaningful, up-front, control over personal information. The sector by sector approach of existing U.S. law makes analytic sense, but progress has been slow and many gaps remain. As a result, efforts to preserve information privacy can be characterized as a constant struggle to set limits on the invasions of privacy-- the misuse, unauthorized collection, and unauthorized disclosure of personal information--made possible and practical through technology.
 

THE CHALLENGE AND PROMISE OF THE INTERNET

It is in this context that we must ask the question: What roles can self-regulation and legislation play in protecting individual privacy in the Digital Age?

Historically, legislation has been the product of a consensus coming out of either successful self-regulatory efforts, or consensus surrounding both the necessity and parameters of legislation in a specific sector. In the absence of consensus, legislation has routinely failed--the inability to enact legislation to protect personal health information over the past 25 years is a painful example--or has resulted in weak legislative solutions. If history is an accurate predictor, then a self-regulatory effort has a role to play in developing a privacy regime for the Internet. In addition, there is an added need to proceed cautiously in this area--whether in legislation or self-regulation-- due to the evolving nature and our evolving understanding of this new media.14

The nature and architecture of the Internet, as well as its users and industry participants, give CDT reason to believe that self-regulation must play a role in preserving privacy online. At this juncture, the decentralized, open, and global characteristics of the Internet may make it resistant to traditional nation by nation, state by state, top- down regulatory regimes.15 Similar to the characteristics of the medium itself, the social and political nature of the Internet is distinct from more traditional media in ways that may be important to privacy considerations and key to industry's motivation to effectively self-regulate. In addition, many pioneers of the electronic frontier are self- described libertarians. And it must be noted that most of the personal information generated, collected, used and disclosed online is not governed by existing privacy policy.
 

An Opportunity to Forge Consensus on Policy

Past battles over privacy policy have largely centered on the mechanism for measuring individual consent. In the traditional information privacy realm, various interests have wrestled with awkward, mechanistic, and largely unsuccessful approaches to allowing people some say over how and whether their personal information should be used by others. Industry has staunchly defended the merits of an "opt-out" approach which presupposes permission to use and disclose personal information unless the consumer lodges an objection. Privacy and consumer advocates have engaged in a largely unsuccessful effort to move industry towards a more privacy-protective "opt- in" standard that would require individual consent prior to the use or disclosure of personal information for unrelated purposes.

The Internet may offer us the opportunity to shift this debate. The transaction costs that attach to the "opt-out"­"opt-in" tug of war in the traditional paper and database worlds may be negligible in an interactive environment. And more importantly, by giving individuals the ability to make up-front decisions regarding the use and disclosure of personal information, the interactive world may offer a policy option that simultaneously supports stronger privacy policy, more secure communications and transactions, and vigorous commerce.

For instance, interactivity makes possible real- time notice and choice options that allow individuals to establish a direct relationship with companies with which they do business. Notice and choice options can be presented at varying levels of granularity, depending on the individual's desire at the time of a particular transaction. Interactions can be tailored by and for the individual. The need for a default standard of either "use and disclose" or "don't use and disclose" may be absent in a world of swift and simple two-way communication.
 

A New Medium

Even in its nascent stage, the Internet has shown itself to be responsive to those who populate it. Users have sent powerful responses to those who have "abused" the Internet. Mass, unsolicited emails typically result in spamming--tons of angry messages deluging the original sender. Users sent Lexis-Nexis a quick and decisive message rejecting their locator service "P-trak" on privacy grounds.16 In response to users' concerns, Deja News quickly added a mechanism to allow users to flag usenet and newsgroup postings that they did not want archived and searchable.17 Similarly, most "look-up" services on the Internet--unlike those in traditional media--give individuals the opportunity to opt-out revealing a sensitivity to Internet users' heightened privacy concerns. In addition, a variety of privacy tools have appeared on the Internet designed to block the collection of information.18

The Internet is alive with people engaged in a host of activities that many consider sensitive.19 Both the people engaged in these activities and those establishing the areas where they take place have a strong interest in developing an environment that engenders trust and confidence in its users. This may bode well for privacy. The combination of a medium that has been responsive to its users, early users who are known privacy fundamentalists, and a tradition of people engaging in activities that they want to keep private, may prove a powerful tonic for individual privacy.
 

Moving Forward

Acknowledging the existing tensions surrounding privacy and self-regulation, CDT and others such as America Online, Microsoft, National Consumers League, and the Electronic Frontier Foundation have created a unique, collaborative model for addressing and resolving these tensions in the privacy area. The Internet Privacy Working Group (IPWG) seeks to be the latest demonstration of the power of bringing diverse stakeholders from the public interest and private sectors together (which is usually what must happen before privacy policy becomes law).

While optimistic about the privacy enhancing potential of the Digital Age, CDT believes that the core privacy principles of notice and individual control over personal information will only be realized if they inform both the policies and the technologies that are the backbone of the information infrastructure. There is a window of opportunity offering the chance to put privacy-enhancing technologies into the hands of individuals. To realize this promise, all members of the Internet community must come together to build an infrastructure that supports privacy policies and applications.

IPWG grows out of a shared interest in examining the possibility of harnessing and expanding the capacity of individual empowerment technologies, such as the Platform for Internet Content Selection (PICS),20 to enhance user privacy. By expanding upon existing technical specifications built to facilitate individual control over content coming into the home, it seems possible that technology can facilitate the communication of Web site operator's information practices to users, and the communication of individuals' privacy preferences to Web site operators. While increased consumer demand and increased industry focus has resulted in some forward progress on privacy issues, there is growing agreement that a collaborative effort to identify and craft workable privacy policies to guide technical developments is needed. At both the November 1995 and June 1996 Federal Trade Commission Privacy Workshops, there were discussions about formalizing a process for moving forward. IPWG is forming to house this process.

During the June, 1996 Federal Trade Commission Privacy workshop many industry and public interest panelists expressed a commitment to pursuing the development of privacy-enhancing technical applications and specifications to meet the public policy goal of providing individuals with notice of information practices and the ability to make decisions about the flow of personal information.21 Working collaboratively with the World Wide Web Consortium (W3C), IPWG hopes to craft a descriptive vocabulary that will allow individuals--and where dictated by law countries--to make a wide range of normative decisions regarding the collection, use and disclosure of personal information. Through its work with the W3C, IPWG will support technical specifications that allow these privacy decisions to become a seamless and ubiquitous part of the Internet experience.

At this point IPWG members have crafted a draft mission and principles statement to guide its efforts.
 

MISSION

IPWG is dedicated to developing policies and technologies that support individual privacy by implementing fair information practice principles. IPWG believes that for the Internet to achieve its full potential for speech, civic and political participation, and commerce, individual privacy must be respected. To realize the benefits of interactive media, individuals must be fully informed about information policies and practices, and able to make informed choices about the use and transfer of personal information. IPWG will craft policies and technical tools that give users the ability to make decisions about the flow of personal information at the front-end while serving multiple interests, including seamlessness, the free flow of information, and the development of global commerce. Through the development of model policies, technical specifications, and public policy guidelines, IPWG will seek to outline a framework for privacy on the Internet.
 

GOALS

To achieve its mission, the IPWG's goals are to:

  • Identify a set of fair information practice principles to guide its efforts.
  • Develop a set of scenarios that illustrate the implementation of fair information practice principles on the Internet.
  • Develop a common vocabulary to enable seamless communications about fair information practice principles between users, and content and service providers.22
  • Foster the development of individual empowerment technologies that facilitate both the seamless communication of service and content provider's information practices to users, and the seamless communication of individuals' privacy preferences to service and content providers.
  • Foster the development of policies, practices, and tools to ensure adherence to fair information practices.
  • Conduct public and policy-maker education on policies and privacy-enhancing tools that will advance fair information practices on the Internet.
     

PRINCIPLES

The following fair information practice principles will guide IPWG's efforts.
 

Fair Information Practice

  • Individuals must be provided timely and effective notice regarding the information practices of all entities operating on the Internet.
  • Individuals using the Internet must be given the ability to make choices about the collection, use, and disclosure of personal information during interactions on the Internet. User empowerment technologies should enable individuals to make meaningful decisions about the collection, use and disclosure of personal information through a set of individually-chosen preferences.
  • Individuals must be afforded the ability to access personal information that they have affirmatively provided (such as subscription information), and the means to challenge and correct it. Individuals must be afforded the ability to access personally identifiable transactional data (such as clickstream data) where it will be disclosed in personally identifiable form for purposes other than supporting the transaction for which it was collected.
  • Internet users must be educated about the personal information generated during Internet use, including: the potential privacy concerns raised; the system purpose served; and the customization of content and service enabled by its authorized use.
     

Operating Guidelines

The privacy potential of interactive communications media will be realized only through the collaborative efforts of policy makers, the public interest community, and the communications and computer industries. IPWG is dedicated to ensuring the participation of all affected users of the Internet. The vocabulary and specifications developed by IPWG must be available to and flexible enough to address the concerns of users, and content and service providers. If embraced and implemented, we believe that technology tools, coupled with fair information practices and policies, can provide an effective method of making individual privacy a reality on the Internet.
 

CONCLUSION

At this early stage in the process it is difficult to predict whether this particular collaborative endeavor will succeed. Historically self- regulation has played a necessary role in creating model policies that provide policy-makers practical blue-prints for later legislation, and give industry leaders the opportunity to establish best practices. CDT strongly believes that the privacy potential of interactive communications media will be realized only through the concerted efforts of policy makers, the public interest community and the communications and computer industries. At this point, we believe that if embraced and implemented, technology tools coupled with fair information practices23 can provide an effective method of making individual privacy a reality on the Internet and serve as a test bed for later legislative or regulatory activity in this area.

By building privacy in at the front-end we have the opportunity to craft an environment where each individual may exercise control over personal information. As the 1995 NTIA report aptly noted, we may have an opportunity to move beyond the current debate over the intrusive nature of technology and seize the opportunity to ensure that privacy protection is a core element of this new communications media:

The promised interactivity of the NII may diminish the need to make a policy choice between opt-in and opt-out. Such interactivity would make it possible for service providers to obtain consent to use [transaction-related personal information] from subscribers electronically before any services were rendered.24

At this point, such a regime is preferable to our current lack of policy, a weak privacy law, or a law that doesn't respect or reap the full privacy-potential of this unique new communications media. Through a combination of policy and technical tools we can take a first step down the road toward effective protections for individual privacy online--if history repeats itself, legislation will surely follow.

_____________________________

ENDNOTES

1 See Turner Broadcasting Sys., Inc. v. FCC, 114 S.Ct. 2445, 2458 (1994).

2 For example, from the Direct Marketing Association's Personal Information Protection Guidelines: "These Guidelines are also part of the DMA's general philosophy that self-regulatory measures are more desirable than government mandates whenever possible."

3 The Electronic Communications Privacy Act of 1986, 18 U.S.C. §2510 et seq. (1995).

4 See, Section 207 of the Communications Assistance and Law Enforcement Act of 1994 (providing heightened protections for transactional data). Pub. L. No. 103414, 108 Stat. 4279 (1994). There is dispute over whether other sections of CALEA solve or create privacy problems.

5 The Cable Communications Act of 1984, Pub. L. No. 98-549, 98 Stat. 2779 (1984) (codified as amended in scattered sections of 47 U.S.C.); and Video Privacy Protection Act of 1988, 18 U.S.C. §2710 (1995).

6 The newspaper and journalism industry did not endorse the bill.

7 See 16 Privacy Times No. 11 (May 30, 1996).

8 It's worth noting that advocates have voiced similar concern with the lack of effective oversight and enforcement provisions in existing legislative privacy solutions, which often lack private rights of action, significant penalties, and/or require the individual to show actual harm or damages to seek redress.

9 Recent activities in the area of children's online privacy offer an early warning to industry of the backlash that can result from a failure to buttress industry policy with oversight and enforcement. At the Federal Trade Commission's (FTC) workshop on Privacy in Cyberspace (June 4-5, 1996) the DMA in conjunction with the Interactive Services Association, and the Children's Advertising Review Unit of the Council of Better Businesses released similar policy statements on the collection of information from children online. Both advocated: 1) providing notice of information collection and the marketing purpose behind it; 2) limiting the collection of data from children; and 3) supporting parents ability to limit data collection on children. Unfortunately few content and service providers operating on the Internet have heeded these guidelines. As the Center for Media Education (CME) and the Consumer Federation of America (CFA) aptly point out in a joint letter to FTC Chairman Pitofsky (November 25, 1996), "five months later companies are continuing to collect personally identifiable information from children at their Web sites without disclosing how the information will be used or who will have access to it" In their letter, CME and CFA provide a long list of Web sites aimed at children that fail to meet basic notice standards--a long standing DMA principle, and a core component of the draft guidelines DMA and ISA released at the FTC workshop. (See attached letter)

10 12 U.S.C. § 3401 (1978).

11 United States v. Miller, 425 U.S. 435 (1976). The Miller decision ultimately turned on the fact that the bank customer could not assert ownership of his documents. The Court held that because Miller's documents were the bank's business records, the expectation of privacy that he asserted was not reasonable. The Court reached this conclusion even though most bank customers probably do have an actual expectation of privacy in those records.

12 12 U.S.C. § 3401 (1978).

13 Section 702 of the Telecommunications Reform Act of 1995, "Privacy of Customer Information," is an important exception to this generalization. Under the new CPNI provisions, the use of information available to a carrier through an individual's use of a telecommunications service may not be used to market other services that the carrier may offer--for example credit or financial services--nor could they provide the information to another company for such marketing--unless the individual makes an affirmative written request for disclosure-- placing the individual in control of the flow of personal information.

14 In the First Amendment area, the rush to address the issue of protecting minors from objectionable content on the Internet led Congress to enact the unworkable, over-broad, and unconstitutional Communications Decency Act. A number of first attempts at crafting privacy legislation for the Internet have met with concerns from privacy and First Amendment advocates as well as communications, computer, and information companies. (see letter to Representative Bob Franks (R-NJ) from the Center for Democracy and Technology, the Electronic Frontier Foundation, People for the American Way, and Voters Telecommunications Watch, raising concerns with the "Children's Privacy Protection and Parental Empowerment Act," June 4, 1996.

15 As countries are discovering in the First Amendment area, enacting a law limiting or criminalizing specific content domestically has little effect on citizens' ability to access the objectionable material.

16 Internet users' outrage over P-trak resulted in action being taken by both the FTC and Congress.

17 DejaNews is a service that organizes all usenet postings into a searchable index by author's name. After several press stories about DejaNews, the company stated that they were instituting a flag that would allow people to notify them that they did not want a particular posting to be archived. This is an example of a limit on subsequent use of information, it is particularly interesting because many users of the Internet would state that usenet postings are public and subject to no reasonable privacy expectation.

18 For example, the Anonymizer offered by Community Connexion allows users to surf the Web anonymously, while PGPcookie. cutter lets users block attempts to access "cookie" files of personal information.

19 Support groups on topics ranging from sexual abuse to drug addiction, discussions on political topics from anarchy to Cuba to Newt Gingrich, and pictures and stories of sexual and other fantasies abound on the Internet.

20 The values-neutral infrastructure initially developed to assist parents in limiting their children's access to inappropriate material.

21 In addition, Commissioner Christine Varney confirmed the FTC's interest in this approach, emphasizing that action must be taken quickly to address this issue. Commissioner Varney followed her workshop statement with a letter reiterating the FTC's intention to revisit the issue of privacy in six months and requesting a report on the progress and feasibility of individual empowerment technologies at that time.

22 The IPWG reviewed various privacy models in crafting its principles: "Privacy and Security Related Principles for the NII," National Information Infrastructure Advisory Council, adopted March 1995; privacy policies developed by various entities operating online such as America Online, Compuserve, Microsoft, Prodigy, and others; "Principles for Providing and Using Personal Information: A Report of the Privacy Working Group," Information Policy Committee of the Information Infrastructure Task Force, finalized October 1995; "The Directive of the European Parliament and of the Council on the protection of individuals with regard to the processing of personal data and on the free movement of such data," adopted in July, 1995; the recommendations of various public interest organizations such as CDT, CPSR, EPIC, EFF, and CME; and the recommendations made by various trade associations such as the DMA and the ISA.

23 In addition, CDT believes that this model will provide a framework for the FTC to pursue unfair and deceptive practices actions.

24 U.S. Dep't Com. Privacy and the NII: Safeguarding Telecomunications-Related Prsonal Information (October 1995) at 26.

 


Children's Privacy and the GII
 

Submitted by

Center for Media Education and Consumer Federation of America(4)
Shelley Pasnik
Mary Ellen R. Fise
 

Armed with sophisticated new research, advertisers and marketers have begun to target the rapidly growing numbers of children online. World Wide Web (Web) sites and other interactive online services are being designed to capture the loyalty and spending power of the "lucrative cybertot category." A variety of interactive advertising and marketing techniques have been developed specifically for this new medium. Many of them threaten to manipulate children and rob them of their privacy. If allowed to develop without any intervention, these practices will become widespread and even more egregious.

In March, 1996, the Center for Media Education (CME) released the results of a major investigation of online advertising and marketing practices directed at children. This study uncovered a number of disturbing new practices posing two kinds of threats: 1) invasion of children's privacy through solicitation of personal information and tracking of online computer use; and 2) exploitation of vulnerable, young computer users through new unfair and deceptive forms of advertising.

This report was an early warning to parents, child advocates, health professionals, and policy makers unaware of the new practices for targeting children online. There is now a window of opportunity to develop safeguards to protect children. The Center for Media Education (CME) along with the Consumer Federation of America (CFA) urge the National Telecommunications and Information Administration to adopt safeguards that will help assure that children fully benefit from the tremendous resources offered via electronic media, without having their privacy rights infringed upon. This paper discusses: the problem of protecting children's privacy online; the limitations of self-regulation in addressing this problem; the limitations of blocking and labeling technologies; and proposed guidelines to protect children.
 

INVADING CHILDREN'S PRIVACY ONLINE

The Web is a powerful tool for reaching young people, with children and adolescents constituting a significant and growing percentage of Internet users. According to Jupiter Communications, nearly five million youth between the ages of two and seventeen used the Internet or an online service from school or home in 1996.1 America Online--the largest proprietary provider of online service--found that of households with children (46 percent of about 3.5 million), 54 percent of children age six to 17 use the service.2 Children, like adults, find the interactive nature of online networks extremely compelling. They can also easily communicate with others online, wherever they are located. They can make new friends, and exchange e-mail with old ones. They can post messages on bulletin boards, and chat in real-time. Unlike TV, which is a prepackaged, one-way medium, online media are dynamic and two-way.3 They give children the power to converse one-to-one, and to display their creations for anyone online to see. Significantly, many children are choosing to spend time online rather than watch television.4 They are logging on rather than tuning in.

The interactive nature of online networks gives them the potential to become the most important medium for children, even more significant than television. Although still in their early stages, online technologies are evolving rapidly. Several recent technological breakthroughs will make online media even more appealing to children. Real-time audio technologies will give children access to music and news from around the world, allowing them to listen to live broadcasts of events or to sample songs from new bands. Shockwave and Java--applications that enhance the multi-media capabilities of the Web--will permit a new level of interactivity online, enabling children to manipulate 3-D objects or remix musical numbers. Real-time video technologies will permit children to see cartoons, music videos, and film clips, and will eventually enable them to watch full-length movies and TV shows online. VRML (Virtual Reality Modeling Language) will be used to create 3-D worlds in which children will immerse themselves, and where they will interact in real-time with other visitors. These new technologies will make children's areas online more and more captivating and more and more lucrative for marketers.
 

Targeting Children Online

Evolving online networks are golden opportunities for advertisers and marketers, who are using them to gain direct access to children of all ages from preschoolers to teens. The sooner they can turn them into obliging consumers, the better.

In the past decade, children have become an extremely valuable market. In 1995, children under twelve spent $14 billion, teenagers another $67 billion, and together they influenced $160 billion of their parents' annual spending.5 In addition to having unprecedented spending power, children are early adopters of high-tech products, making them a disproportionately important market for the new interactive media.

Marketers see online networks as a fertile new frontier for tapping into the children's market. "This is a medium for advertisers that is unprecedentedthere's probably no other product or service that we can think of that is like it in terms of capturing kids' interest," remarked Erica Gruen, director of Saatchi & Saatchi Interactive.6

Ad agencies have begun to devote major resources to using online media to give their clients unprecedented access to children. A perfect example is Saatchi & Saatchi, which has set up special units to carefully study children online and to develop sophisticated marketing strategies to target them.7 Cultural anthropologists have been hired to examine the nature of "kids' culture;" researchers have studied how children process information and respond to advertising; and psychologists have conducted one-on-one sessions with sample groups of children. These experts found that children, whose "learning skills are at their peak," can easily master the new media's learning curve, which is often daunting for adults.8 They also determined that the online world corresponds to the "four themes of childhoodattachment/separation, attainment of power, social interaction, and mastery/learning."9 And, perhaps most important, they found that when children go online, they quickly enter the "flow state," that "highly pleasurable experience of total absorption in a challenging activity." All of these factors make online media a perfect vehicle for advertising to children. Says Gruen: "There is nothing else that exists like it for advertisers to build relationships with kids.10

While children are grappling with the four fundamental trials of growing up--gaining independence, developing strength, getting along with others, and mastering new skills--their vulnerabilities are exposed. Having identified how children use their online experience to meet developmental needs, the advertising industry is learning how to exploit young computer users more effectively. The practices advertisers are using to build relationships with children are calculated to make children believe that many of their needs can be met through their online experiences. Once children are totally absorbed in an online advertising environment, they are at their most defenseless, and are perfect targets for pitches of all sorts.

Online media are ideal for one-to-one marketing that involves "selling to customers one at a time and getting each one to buy as many products as possible over a lifetime."11 The sooner marketers can reach children, the more products they can sell to them over the years. Online advertisers are now targeting children as young as four.12

One-to-one marketing gives advertisers unprecedented power over children. By capturing their attention online, marketers are able to circumvent their normal guardians. Rather than being mediated by parents and teachers, advertising reaches children directly, enabling companies to establish individual relationships with vulnerable young computer users. Using the personal information actively and passively disclosed by each child, it is possible for companies to craft individualized messages and ads. Whether a child receives a personalized message from the Power Rangers or a special offer to buy a product he or she really wants, it will be hard to resist. If advertisers can create and nurture relationships through microtargeting, they will be able to develop unique and long lasting brand loyalty.
 

New Techniques for Captivating Children

The Center for Media Education's research uncovered a number of marketing and advertising practices that are potentially very harmful to children. These practices have been grouped into two categories: 1) invasion of children's privacy through solicitation of detailed personal information and tracking of online computer use; and 2) exploitation of vulnerable young computer users through new manipulative forms of advertising. The first set of practices includes:

  • eliciting personal information from children through the use of prizes, games, and surveys;
  • monitoring children's online activities and compiling detailed personal profiles; and
  • designing personalized advertising aimed at individual children.

The second set of practices includes:

  • designing advertising environments to capture children's attention for extended periods of time;
  • seamlessly integrating advertising and content; and
  • creating product "spokescharacters" to develop interactive relationships with children.
     

Collection of Information from Children

The interactive nature of the Internet gives marketers unprecedented power to gather detailed personal information from children. This information can be collected in two ways: 1) overtly, using sophisticated techniques to elicit data from children, and 2) covertly, using state-of-the-art software to track children's online behavior. Both complementing approaches enable marketers to compile profiles of each child, and then to "microtarget" to them individually with personalized advertising. Information collected from children can also be sold to third parties.
 

Using Prizes, Games and Surveys

A growing number of children's areas are now eliciting personal information. Some use incentives, promising free gifts such as T-shirts, mousepads, and screensavers, in exchange for such personal data as e-mail address, street address, purchasing behavior and preferences, and information about other family members. Disclosures of personal information often are mandatory when a child wants to play a game, join a club, or enter a contest. Other Web sites require children to complete registration forms and questionnaires in order to proceed into the site.

Children are not aware of the potential consequences of disclosing information about themselves and their families. Youngsters are less capable than adults of discerning the motives behind such giveaways, contests and surveys, and easily fall prey to such marketing techniques. They also are still quite egocentric and live to answer questions about themselves. Children also imbue their personal computers with a certain level of trust. One online children's service recently published results from a survey that asked children who they trusted more--their parents or their computers. The majority of respondents said they put more trust in their computers.13

Even when children are not required to supply information, it is often compelled by the use of hard-to-resist incentives--prizes, club memberships, or the opportunity to role-play in a superhero's town. Left with few defenses, children willingly answer probing questionnaires. The following are examples of the techniques currently being used to elicit personal information from children:

The KidsCom communications playground, aimed at children 4 to 15, uses a forceful approach. In order to enter the site, each child is required to disclose his/her name, age, sex and e-mail address. The mandatory questionnaire also requests his/her favorite TV show, commercial and musical groups, as well as the name of the child who referred him/her to KidsCom. Once children have entered the playground, they are encouraged to supply additional personal information in order to win "KidsCash," a form of virtual money that can be used to purchase conspicuously-placed products that are highly popular with children. (http://www.kidscom.com/)14

Taking advantage of children's desire to belong to a group, the Splash Kids area on the Microsoft Network promises to make children "Splash" Kids" if they cooperate and answer questions about themselves. To ensure that children comply, a Sony Discman is offered as a prize. A prominently-placed icon, which reads "Sign-up and Win," is linked to the questionnaire that children are asked to complete in order to be eligible for the monthly give-away. (Splash Kids is also a Web site: http://www.splash.com/)15

At the Batman Forever Web site, supplying personal information becomes a test of loyalty. "Good citizens of the Web, help Commissioner Gordon with the Gotham Census," children are urged. Although the survey uses the guise of a virtual city's census, much of the information sought pertains to purchasing habits and video preferences. For example, respondents are asked how likely they are to buy Batman Forever and Apollo 13 on video. (http:// www.batmanforever.com/)16

The manipulative forms of these information requests secure children's cooperation without their parents' intervention. These surveys are skillfully blended into children's online environments so that children do not perceive them as any kind of threat. Marketers can circumvent parents very successfully. Even in rare cases when children are told that some information is optional and to "check with your parents first," such disclaimers are likely to be ineffective. Burying such comments in the middle of a survey can hardly be construed as an adequate warning, and it is certainly no match for a chance of winning a Sony Discman.17
 

Tracking Children

One of the unique features of online communications is the ability to collect what is known as usage information or navigational data by auditing Web sites and content areas. Computer technologies make it possible to track all interactions users have online, often referred to as clickstream data or "mouse droppings." Such covert data collection is becoming an essential tool for online advertisers. Unlike TV ratings, which generally use anonymous aggregate numbers, to reveal the viewing behavior of key demographic groups, online usage data can track how individuals respond to and interact with advertising. A burgeoning industry has developed to provide such online tracking services.

To attract advertisers to online areas, companies need assurance that their ads will be seen by a significant number of people. To meet this need, corporations, such as Netscape and I/PRO, have developed elaborate systems for collecting visitor information. These two companies have devised some of the most popular tracking methods.18 Netscape Communications Corp., maker of the most widely used Web browser, utilizes "cookies" to track computer users' online activities. Cookies are files stored on the hard drives of all Netscape users, which log every site they visit, and every page they access at each site. Companies using Netscape software can access the detailed logs of previous visits to their site each time a user returns.19 Using a different covert measurement tool, I/PRO assigns an identification code to Web users so that they can be tracked on any I/PRO customer's site.20 The information collected by these systems and others like them can be used to compile detailed individual profiles.

A variety of other companies are also refining software to surreptitiously monitor the behavior of users online. Such covert tools are being used to track children as well as adults:

Though presented as a playground for children, the entire KidsCom site is really a sophisticated market research tool. Operated by the SpectraCom Company, the primary purpose of KidsCom is to collect information about children for the company's clients. SpectraCom boasts of its "proprietary data verification and usage report system that runs periodical, statistical usage programs which enable tracking of all Web server connections and usage statistics for each server, page, and item a user may select." (http://www.spectracom.com/description.html)21

By marrying tracking data with personal information elicited from users, advertisers are able to compile detailed profiles of individuals--a key to what industry insiders call "one-to-one marketing."22 Hotwired--the online sibling of Wired magazine--is experimenting with customized ads. Hotwired's "smart messaging" allows marketers to customize their advertising messages based on the location of the computer being used to view their Web site.23 As Hotwired's Louis Rosetto recently noted, "What we do well is deepen relationships and create more immediate one-to-one connections with a customer base."24
 

Microtargeting Children

This practice of tailoring ads to individuals, known as "microtargeting," is expected to become the predominant mode of marketing online. It is at the heart of current plans for a number of children's online services. In this first stage of microtargeting children, many sites have begun responding to new users with personalized messages. Once a child visits a site, she begins receiving unsolicited e-mail messages, urging her to return, and promising exciting gifts and new activities.

Registering at the Kellogg's Clubhouse Web site prompted the following e-mail message:
 

From: kellogg@magnet.com

Date: Thu, 8 Feb 1996 20:33:35 -0500

To: sp@cme.org

Subject: Happy Valentine's Day!
 

Check out the Interactive Valentines on Kellogg's homepage on the World Wide Web. Design one! e-mail it to your cyberspace friends! or print it for personal delivery! Go to the Rec Room right now (http://www. kelloggs.com/ec.html), and Crackle (TM) will help you send a special Kellogg's (R) Valentine card!

Happy Valentines Day!

Love,

Snap! Crackle! Pop! (TM)

http://www.kelloggs.com

In an effort to test how the Web site in the above example dealt with very young children, the age of five was listed when a marketing survey was completed for the site. Kelloggs seized the opportunity to cultivate a one-to-one relationship with a five year-old.

If left unchecked, these techniques quickly will evolve into even more sophisticated efforts to target children. Using individualized advertising, based on intimate knowledge of each child's interests, behavior, and socio-economic status, will give online marketers unprecedented powers to tap each child's unique vulnerabilities.

BroadVision, a business software company, has developed what it refers to as a "One-to-One" systems application. Central to BroadVision's software is the concept of building advertising relationships one customer at a time. As a recent article explains, "This goes beyond simple transaction processing and secure payment systems: it's about building relationships with customers online--knowing each customer by name, knowing their preferences and buying patterns, observing the customers over time, and using this data to sell more effectively to them."25

The use of electronic surveys, such as the one found on the KidsCom's Web site, may foster a new wave of direct marketing. The collection of children's personal information using more traditional methods has already generated much public concern. Marc Klaas, father of Polly Klaas and founder of the Klaas Foundation for Children, is attempting to stop the collection and selling of children's personalized market research data. Klaas is focusing on one company in particular, R. R. Donnelley & Sons and its Metromail subsidiary, to bring attention to the way in which children's information has become a valuable commodity among marketers. As the Klaas Foundation's Web site claims, Metromail adds information on 67,000 children to its database each week. Much of the information in Metromail's library on 6.5 million Californians came from consumer-completed surveys and response cards.26

Currently, there are no regulations that prevent personal information on children from being collected or sold to third parties. Sophisticated data collection and microtargeting techniques could be used to prey on children, exploiting their sense of trust, and manipulating both their preferences and their behavior.
 

LIMITATIONS OF SELF-REGULATION

Representatives of online service providers and advertisers have argued that consumer education and industry self-regulation will be sufficient to protect the privacy of online users.27 However, nearly a year after the release of CME's report we find that companies are continuing to collect personally identifiable information from children at their Web sites without disclosing how the information will be used or who will have access to it, and without requesting parental consent. It is clear that industry self-regulation does not provide adequate protection for children's privacy.

While industry leaders may argue that they can police themselves through self-regulation, past experience demonstrates that effective self-regulation is highly unlikely, and will not develop at all without some government intervention. There is little evidence that industry leaders even recognize the need to set limits on the marketing onslaught aimed at vulnerable youngsters. Instead, the emphasis is on continuing to refine techniques for creating loyal, lifetime consumers.

CME/CFA believe that children's privacy can be effectively protected only by a combination of comprehensive, understandable disclosure and verifiable parental consent. Currently, many sites offer no disclosure regarding the collection of information, whether it is aggregate and anonymous or personally identifiable.28 Where sites do offer some form of disclosure, it is usually insufficient to permit meaningful consent. Where sites disclose that information is being collected, they almost universally fail to ask children to obtain parental consent before providing personally identifiable information. At the handful of sites that actually request parental consent, none can actually verify whether consent has been granted.

Nor is it reasonable to expect parents to effectively protect their children from these practices. While many parents may try to monitor their children's use of online services, it is not an easy task. Unlike television, which the entire family may watch together, many children use their computers alone.29 Children also tend to have greater computer skills than their parents, which makes periodic monitoring more difficult. And because of the "halo effect," arising out of the educational uses of computers, many parents implicitly trust computers, preferring that their children go online instead of watching television.30 They are unaware that children's Web sites can be more intrusive and manipulative than the worst children's television.
 

LIMITATIONS OF BLOCKING AND LABELING TECHNOLOGIES

Given children's limited power to protect themselves on the information superhighway, the Direct Marketing Association (DMA) and other industry representatives have argued that the best defense from exploitative people and practices encountered online may be well-placed traffic lights. In other words, let problems caused by the development of new technologies be solved by even newer technological solutions. DMA has asserted in past FTC proceedings that parents can "take advantage of available software tools and parental access controls to restrict their children's access to particular sites if they so desire."

Not surprisingly, a number of companies have begun developing software tools to aid parents in their efforts to screen material. The new technological screening software services--e.g., SurfWatch,31 Cyber Patrol,32 Net Nanny, SafeSurf,33 CYBERsitter34--are also not likely to adequately address the problems presented by online advertising and marketing to children. Most of the software programs were developed to protect children from sexual materials, rather than manipulative advertising and intrusive marketing practices.35 Even if software were created that could effectively screen out such practices, its value would be limited to those parents who could afford it, learn how to use it, and to devote the time needed to install and regularly update it. Although CME/CFA strongly support the use of technology to customize the information that is released by children to comport with their parents' judgment and preferences--we recently joined the Internet Privacy Working Group's efforts to create a PICS-based system--these technology-based tools have significant limitations when trying to protect children's privacy overall.36
 

Blocking Technology

While technology alone will not solve the problem, it could be used to reinforce future regulatory safeguards, setting tight limits on online marketing and technological approaches that might be employed to help protect children from commercial excesses online. The first four of these involve parental control software, which enables parents to prevent children from having access to "objectionable" material. Developers of parental control software have focused on sexual material, and paid little attention to advertising. But there are several elements of such software which might be utilized to support regulations shielding children from the coming marketing onslaught.

Blocking access to particular sites. A number of parental control programs allow parents to block access to any specific sites they choose. Given the huge and rapidly growing number of sites online, this may not seem like a very practical way to screen out offensive advertising. Some of the programs streamline this process by generating a list of sites a child has visited, allowing parents the opportunity to easily examine and restrict access to sites that concern them. If parents learn that their children are captivated by Chester CheetahTM or spending hours in the Kellogg Clubhouse with Snap! Crackle! and Pop!, they can block access to these sites. One drawback with this approach is that it achieves blockage after the child has been to the site or the parent has learned of the site on his/her own.

Blocking access to certain types of material. Some of the screening software also can block out entire categories of content, using key words to identify objectionable sites. While this type of filtering program is able to screen out advertising sites, it only blocks advertisements for pre-designated products. For example, children would not be exposed to banner ads for beer and cigarettes if their parents had selected "alcohol and tobacco" as a restricted category. Given the abundance of products being pushed in cyberspace, it would be next-to-impossible to use a key-word mechanism to combat online commercials. In fact, some of the parental control programs may actually be contributing to the problem of online advertising targeted at children. Cyber Patrol is a case in point. On the one hand, Cyber Patrol has added some types of advertising (e.g., alcohol and tobacco) to its list of indecent, sexual or otherwise offensive content sites. But Cyber Patrol is itself a vehicle for advertising targeted at children. Whenever children try to view a blocked site, they are subjected instead to an ad for one of Cyber Patrol's home edition sponsors, that will be "hotlinked" directly to that advertiser's Web site.

Preventing children from disclosing personal information. Software also may help protect children from invasions of privacy by marketers. Although developed for a much different purpose (to protect children from potential child molesters), CYBERsitter allows parents to prevent children from disclosing their addresses or phone numbers when they are online. It may be possible to develop software that will further limit the amount of personal information online advertisers request from children, whether it is requested to join a club or be eligible for a prize.

Expanding parents' choice of rating systems. Today none of the parental control programs are geared to advertising (with the limited exception of Cyber Patrol), and none are expected to focus on the problem of online commercial manipulation of children in the near future. However, a new set of online protocols has been developed that may enable parents to select from a variety of rating systems, and use whichever combination is best suited to their children.

Blocking access to ad banners. So far only one program, WebFilter, has been created for the sole purpose of blocking ads online. It illustrates the limits of technological solutions to the problem of online children's advertising.

Unlike parental control software, which has other goals, WebFilter blocks access to ad banners on the Web. Developed by Axel Boldt, a math graduate student at University of California, Santa Barbara, WebFilter is freeware that uses a library of filter scripts to prevent ad banners from being seen. Boldt maintains a "Black List of Internet Advertisers," and is promoting a "No-Ads" icon that serves as a seal of approval for sites completely free of advertising (http://emile.math.ucsb. edu8000/~boldt/NoShit).

WebFilter is powerless against banner-free corporate Web sites where commercial messages are merged with content. Boldt warns that without some advances in artificial intelligence programming, WebFilter will be ineffective against the upcoming melange of interactive advertising using animation, audio clips, and video. Some technological breakthroughs (such as Sun Microsystems' Java programming language, which will make the Web more interactive) raise as many problems as they solve, Boldt maintains.

While the blocking approach has its merits when applied to potentially objectionable material, this same approach is fundamentally flawed when applied to children's personal information.37 Objectionable content is discrete and can be identified by each individual according to his or her values. A person can point to certain content areas on the GII, declaring "the pictures on this Web site and the topic of that chat room are something I don't want my daughter to see." That same daughter's personal information, on the other hand, is much more malleable, changing from one context to the next. For example, a father certainly may wish to prevent his son from giving his name and street address to an online stranger or to an online salesperson, but he may want his son to give the same information to his baseball coach and this week's carpool driver.

Arguably, the father could override the blocking software in the last two cases and permit his son to provide the necessary information, allowing the coach and carpool driver to use e-mail to communicate and organize. But what about all of the other instances when the boy has legitimate and desirable reasons to share his name and street address? What about all those instances when his son wants to sign his name to an e-mail message sent to a keypal? Or telnets to the local library to research a class project and is asked to supply his name and library card number? Or wants to compete in an online soccer tournament sponsored by his church youth group, which needs his name in order to place him on a team?

There are a countless number of online situations where the boy would want to use his name. By installing blocking technologies onto the family computer, the father not only thwarts nefarious requests for his son's information, but the legitimate ones as well. If children's privacy is to be protected, then it is not enough to allow all kinds of information solicitation to take place with the excuse that they can be blocked. This would be analogous to decriminalizing all criminal acts and telling citizens they can buy a gun and fend for themselves: the result is ineffectual vigilantism. It is unreasonable to expect that parents must block all requests for information--the noncommercial ones included--just so they can prevent their children from being bombarded with commercial solicitations for personal data.

Only by arming parents and children with adequate explanations of collection practices are they able to determine when to release information. Blocking software alone is not sufficient as it does not create the policies necessary to ensure that marketers fully and effectively disclose their collection and tracking policies. As the Center for Democracy & Technology (CDT) explained: "To have privacy in the Digital Age one must be able to both enjoy solitude and to make decisions about what, if any, personal information to divulge, to whom and for what purpose. In the Digital Age technology can be harnessed to advance privacy by empowering individuals to control the flow of information on a case by case, setting by setting basis, by expressing his or her privacy desire."38 Full and effective disclosure affords young computer users and their parents the opportunity to make decisions about the release of information on this much-needed case-by-case basis.

The strength of this new medium is its ability to communicate, educate and inform. Overly broad technological "fixes" miss the goal of providing children with access to a multitude of ideas and interactive experiences. As Jon Katz elucidates in his recent article "The Rights of Kids in the Digital Age:" Some of these programs have thousands of potentially forbidden categories, going far beyond sex and violence. Once applied, censoring and restrictions inevitably will spread into other areas that adults want to place off-limits: political topics that differ from their own values, music and movie forums that don't conform to their adult tastes, online friends that don't meet their approval, Darwinian theory.39 CME/CFA wholeheartedly agree with CDT's "strong interest in developing an environment that engenders trust and confidence"40 and believes that the surest way to accomplish this goal in the commercial arena is to educate consumers through effective disclosure and to implement fair information practices.
 

A Ratings System is an Inadequate Way to Safeguard Children's Privacy

A ratings system, principally the Platform for Internet Content Selection (PICS), is another technological approach that has been suggested as a viable solution to privacy concerns. Once implemented, PICS is intended to be "a viewpoint-neutral technology platform that will empower organizations and individuals to categorize and selectively access information according to their own needs."41 PICS was developed by the MIT-based World Wide Web Consortium42 and includes Netscape, Microsoft, SafeSurf and a host of other major online and computer firms. DMA and others contend that PICS can be used to label Web sites according to the privacy preferences of individual users. CDT's statement presents three scenarios demonstrating how the PICS system works in an attempt to further the notion that PICS will help safeguard privacy.

While CME/CFA acknowledge the potential benefit of a ratings system--parents will have a shorthand way of identifying appropriate content for their children--CME/CFA also are fully cognizant of the inadequacies of the PICS system. Most importantly, the PICS system cannot be applied to e-mail, chat rooms, news groups or listservs. This is a grave omission given children's proclivity for these applications within the GII. Basic communication--exchanging e-mail letters, posting messages to bulletin boards, comparing thoughts about shared interests--is the biggest attraction that computers have for children.43 Apart from the many implementation problems that PICS must overcome, this rating system should not be used as a substitute for a comprehensive set of privacy guidelines.

But while PICS will enable public interest groups to develop and distribute their own rating systems to parents, such services will require substantial resources to establish and maintain. Organizations providing rating systems will have the labor-intensive tasks of regularly evaluating all new sites and continually reevaluating existing ones. Most groups will not have the resources to develop and market a workable rating system.44

It is unlikely that a technological fix will be found to address the complex concerns raised by online advertising to children. The seamless interweaving of content and advertising online makes it very difficult to determine where ads begin and end. The resources that advertisers can devote to developing new technologies for marketing to children dwarf those available to public interest organizations concerned with protecting children. So far remarkably little effort has been made to develop software that will shield children from commercial manipulation.
 

PROPOSED GUIDELINES TO PROTECT CHILDREN ONLINE

To address online violations of children's privacy, CME/CFA propose swift adoption of guidelines pertaining to the collection and tracking of information from children for commercial marketing purposes.45 The guidelines, described below, are intended to protect children from deceptive and unfair practices on the Global Information Infrastructure and in other interactive media.

Commercial marketing purposes46 include, but are not limited to, practices that:

Promote, sell or deliver goods and services through direct sales pitches, brand awareness-building campaigns, and other similar marketing strategies;

Perform market research;

Foster the promotion, sale or delivery of goods and services through the sale, rental, compilation, or exchange of lists; or

Delete and add individual children, members of their families, other household members, and other persons the child knows to lists.

Commercial marketing is achieved through information collection and tracking. Information may be collected through surveys, registration forms, questionnaires, chat rooms, clubs, contests, and other means. Information may be tracked, analyzed or audited (hereinafter "tracked") by using navigational tools. These tools reveal information such as pages visited, length of stay, images and information downloaded, referring URL,47 and content viewed.

These guidelines require all persons who collect or track information48 [hereinafter "information collectors/trackers"] including, but not limited to Web masters, online content providers, Internet service providers, Web measurement companies, and commercial online service providers to fully and effectively disclose all of their collection and tracking practices. In addition, these guidelines prohibit the collection or tracking of personally identifiable information from children unless valid parental consent is obtained.

These guidelines apply to the collection and tracking of both personally identifiable information and information that is aggregate and anonymous.

Personally identifiable information includes:

any information that is linked to or allows for the identity of individual children, their families, household members or other individuals the child knows to be determined. This information includes, but is not limited to, a child's name, address, e-mail address, telephone number, and social security number;

other information such as physical description, psychological description, health, school, date of birth, family income, and information regarding a child's likes, dislikes, habits, and opinions when used in conjunction with identifying information as described above; or

any information collected from a child about that child's family, household members or other individuals the child knows when used in conjunction with identifying information as described above.

Aggregate and anonymous information includes:

only data that provide demographic characterizations and information that cannot be traced to an individual child, their families, household members or other individuals the child knows; or

any information about the likes, dislikes, habits, opinions and preferences that may not be traced to a particular child, family, household members, or other individuals the child knows.

These guidelines are intended to balance children's interest in receiving diverse information with the interest in protecting children from deceptive and unfair commercial marketing practices that take advantage of their unique vulnerabilities in these new and evolving media.
 

General Requirements

First, anyone who uses the Global Information Infrastructure or other interactive media to collect or track information from children under the age of 16 for commercial marketing purposes must provide full and effective disclosure. Second, all information collectors/trackers must obtain valid parental consent before collecting and/or tracking personally identifiable information from children. Third, where children and parents have chosen to disclose personal information, information collectors/trackers must provide a procedure through which information that has changed over time may be corrected. Finally, where a parent has consented to the release of the child's personal information, but later decides not to permit its use, information collectors/trackers must provide a process for preventing the further use of information previously disclosed.

Disclosure: In order to be effective, disclosure notices must be sufficiently clear and prominent to prevent deception. All disclosures must comply with the requirements listed below:

Information collectors/trackers must disclose all information necessary to permit a child/parent to make an informed decision, including, but not limited to:

A description of what information is being collected or tracked. Collectors/ trackers must disclose whether the information they are collecting is personally identifiable information, such as an individual's name, street address, phone number, social security number; or aggregate and anonymous information, such as product preferences and hobbies. Collectors/trackers must also disclose what information they are collecting/tracking through navigational software including information pertaining to sites visited, length of stay, and the images downloaded.

An explanation of the mechanism(s) through which the information is collected and/or tracked. Collectors/trackers must disclose the means through which they collect the information. For example, collectors/trackers must disclose whether information is collected through on-screen surveys, questionnaires, contests, and sweepstakes entries, or through server-based navigational data tracking and browser files such as Netscape's cookies.

A summary of how the information will be used. Collectors/trackers must disclose whether the information will be used to promote products through e-mail messages, to refine internal marketing strategies, or for re-sale to interested third parties. The collector/tracker must also disclose whether the information will be used to re-contact a child online or through other media including, but not limited to, fax, phone, and postal mail. This must be disclosed if the collector/tracker plans to re-contact the child itself or if the collector/tracker plans to rent, sell or otherwise release the information to a third party who may re-contact the child.

Identification of who is collecting/tracking the information, their relationship to the information and how they can be contacted.

Identification of all other persons that will have access to the information and their commercial interest in the information. No persons other than those originally identified in the disclosure notice may be provided with this information until a new disclosure notice is issued and parental consent is again obtained.

Notice that valid parental consent must be obtained prior to the collection of personally identifiable information.

Notice of the procedure to correct previously collected personally identifiable information.

Notice of the process for preventing further use of personally identifiable information previously collected.

Effective disclosure also requires that the disclosure notice described above be easy to understand, compelling, and prominently displayed from the perspective of a child.

Language must be appropriate for children. For example, the same level of vocabulary that a company uses to describe a game or other activity on its Web site must be used when disclosing information practices.

The language must be easily read, and if possible, also audible to children in the online medium. Print which by its small size, placement, or other visual characteristic is likely to substantially affect the legibility or clarity of the offer or expectations to it should not be used.49 A site that places its disclosure notice behind an unidentified hyperlink at the bottom of the page also is not in compliance with this requirement.

The disclosure must directly precede and be on the same page as the collection or tracking practice.

Contrary claims will undercut the effectiveness of the disclosure and must not be present. Many children are incapable of wading through facetious or mixed messages. For example, if a young visitor to a site is told to "ignore the fine print and click here to get to the good stuff" or a disclosure notice is marked "boring adult area" the child might be disinclined to continue reading.

Parental Consent: Information collectors/ trackers must obtain valid parental consent whenever personally identifiable information is collected from children. Consent must be obtained at points of promotion, points of transaction, and all other points where information is collected or tracked. Consent is only valid for the information practices described in the disclosure. Parental consent must be received from a person authorized to consent on the child's behalf, such as a parent or legal guardian.

To obtain valid parental consent, the following steps must be followed:

It must be made clear to the child that parental consent must be obtained before proceeding and the parent must receive complete disclosure as described above;

Access to those areas of the site where information is collected or tracked must be conditioned on receipt of valid parental consent; and

The burden is on the collector/tracker to obtain valid parental consent, which may be obtained:

in writing, received via postal mail; or

through effective electronic mechanism(s) once developed.50

Correction Procedures: Information collectors/trackers must provide a procedure through which personally identifiable information previously collected may be corrected if that information has changed since its original collection.

Preventing the Use of Information: Information collectors/trackers must provide a process for preventing further use of personally identifiable information previously collected.
 

CONCLUSION

Given the unique concerns surrounding children and online technologies, safeguards prohibiting the collection of personally identifiable information from children should be adopted. Online advertisers are developing invasive information collection and tracking practices, which deceive and treat children unfairly. Industry self-regulation will not adequately protect young people nor will blocking technology and selection software. Not only should disclosure be required when a company collects data from children online, valid parental consent for the release of personal information should be obtained. A clear set of enforceable privacy guidelines will help assure that children fully benefit from the wealth of resources available online.

__________________________________

ENDNOTES

1 "Children using Internet/online services, 1995-2002." Digital Kids, February, 1997.

2 Randolph, E. AOL: Kids only channel, Digital Kids Report, 24, January 1997.

3 P. Friedman, Vice President and General Manager, eWorld, referred to the Internet as a "participatory medium."

4 According to Nielsen Media Research, CommerceNet, and WebTrack, three companies that regularly conduct Internet demographic surveys, time spent online is starting to cut into time spent watching television for both children and adults. "What Did Kids Do Before the Internet, Grandpa?" Marketing Tools, March/ April 1996. J. Dibbel, "Nielsen Rates the Net," Time, November 13, 1995. "The Net Vs. The Tube," Variety, November 13, 1995.

5 "Big Allowance," Interactive Marketing News, November 10, 1995. "Teens Spend Money--Their Family's and Their Own," Youth Markets ALERT, March 1996.

6 E. Gruen, "Defining the Digital Consumer IV Agenda: Digital Kids Pre-Conference Seminar," New York, NY, October 25, 1995.

7 "Children Get Growing Online Attention," Interactive Marketing News, November 10, 1995.

8 E. Gruen, "Defining the Digital Consumer IV Agenda: Digital Kids Pre-Conference Seminar," New York, NY, October 25, 1995.

9 "Children Get Growing Online Attention," Interactive Marketing News, November 10, 1995.

10 E. Gruen, "Defining the Digital Consumer IV Agenda: Digital Kids Pre-Conference Seminar," New York, NY, October 25, 1995.

11 M. Perkins, "Mining the Internet," The Red Herring, March 1996.

12 The KidsCom Web site describes itself as a "communications playground just for kids ages 4 to 15." (http://www.kidscom.com/)

13 The survey was on the Nickelodeon area of America Online, January 1996. Similarly, explaining the techniques used by Kid2Kid, a self-described "kids marketing research, design and consultation resource," Whiton S. Paine and Dr. Mitch Meyers explained how their company uses children's comfort with computers to elicit data from young users. "TECHNO Kids Conference," Chicago, IL, September 13, 1995.

14 February 29, 1996 contents of Web site.

15 November 29, 1996 contents of Web site.

16 November 10, 1995 contents of Web site.

17 The survey on the Splash Kids Web site and content area on the Microsoft Network uses this approach. (http://www.splash.com/)

18 Among the log analysis tools resources listed in a recent Marketing Tools article are: Yahoo! (http://www.yahoo.com/Computers_and _Internet/Internet/World_Wide_Web/HTTP/ Servers/Log_ Analysis_Tools/); BrowserCounter 1.0 (http://www.netimages.com/ ~snowhare/utilities/browsercounter.html); wwwstat (http:www.ics.uci.edu/stats/gwstat. html); AccessWatch (http://www.eg.bucknell. edu/~dmaher/accesswatch/); Open Market WebReporter V1.0 (http://www.openmarket. com/ products/Webreport.html); Web Audit (http://www.wishing.com/Webaudit). In addition to I/PRO, the measurement and tracking firms listed are: The Delahaye Group (http://www.delahaye.com/); WebTrack (http://www.webtrack. com/); Audit Bureau of Circulations (http://www.accessabl.com/); Nielsen Media Research (http://www. nielsenmedia.com/). K. Bayne, "Is Your Site a Success?" Marketing Tools, March/April 1996.

19 Netscape 2.0 includes cookies as one of its features. The company has indicated that upcoming versions may allow users the right of refusal. In the meantime, Netscape has been asked by the Internet Engineering Task Force to propose cookies as a standard for the Internet. J. Rigdon, "Internet Users Say They'd Rather Not Share Their 'Cookies,'" The Wall Street Journal, February, 14, 1996. Netscape: (http://home.netscape.com/)

20 K. Murphy, "Net.Genesis Tool to Track Site Usage," WebWeek, February 1996. Internet Profiles Corporation's (I/PRO): (http://www.ipro. com/)

21 March 8, 1996 contents of Web site. Company information about SpectraCom is provided in the "Parents and Teachers Place" on the Web site, but it is hidden behind an area that gives tips on how to use computers and the Internet. Only if one clicks on the "hyperlink" to the SpectraCom Web site will the true intent of the KidsCom site be revealed.

22 D. and M. Rogers, The One to One Future: Building Relationships One Customer at a Time (New York: Currency Doubleday, 1993).

23 Hotwired's promotion was in conjunction with a four-week sponsorship with Argos P.L.C.

24 S. Elliot, "How to Focus A Sales Pitch in Cyberspace," New York Times, March 4, 1996.

25 M. Perkins, "Mining the Internet," The Red Herring, March 1996.

26 The Klaas Foundation for Children's Web site: (http://www.klaaskids.Inter.net/) "Data Firms Sell Personal Information on Nation's Children," Business Wire, March 14, 1996.

27 See generally DMA Commentary on FTC Workshop on Privacy and Cyberspace. See also CME/CFA Post Hearing Comments, June 19, 1996. (Details the weaknesses of the proposed DMA guidelines.)

28 Personally identifiable information includes any information that allows the individual child to be identified. Aggregate and anonymous information includes all data that cannot be traced to an individual child.

29 How children use computers was a topic that was discussed at the "TECHNO Kids" and "Digital Kids" conferences. Representatives from the industry presented their market research and focus group findings. "TECHNO Kids Conference," Chicago, IL, September 13, 1995.

30 D. Britt, "Defining the Digital Consumer IV Agenda: Digital Kids Pre-Conference Seminar," New York, NY, October 25, 1995.

31 http://www.surfwatch.com/

32 http://www.microsys.com/CYBER/

33 http://www.safesurf.com/

34 http://www.solidoak.com/

35 A recent article in The Washington Post reiterates that exploitative advertising and privacy invasions still are not the focus of selection software. Linton Weeks, "A Safety Net for Children, New Software Blocks What Kids Can Access," February 27, 1997.

36 CME/CFA are concerned that a browser-based privacy protection system may lead to more exploitative marketing behavior. It is possible that the system will include a negotiation process, thereby allowing companies the opportunity to bribe children with incentives to change their privacy preferences.

37 Ironically, in order to obtain a "free" copy of one of the software packages, users must provide information to the company. As the Communications Decency Act decision recently noted, parents can download a seven day demo of the full version of Cyber Patrol from the Microsystems Internet World Wide Web Server. At the end of the seven day trial period, users are offered the opportunity to purchase the complete version of Cyber Patrol or provide Microsystems some basic demographic information in exchange for unlimited use of the Home Edition. The demographic information is used for "marketing and research purposes." (paragraph 60, CDA.)

38 CDT filing, "The Empowered User: Implementing Privacy Policy in the Digital Age," submitted to the FTC, p.11.

39 J. Katz, Wired, July 1996.

40 CDT, p.15.

41 According to MIT's Albert Vezza, a spokesman for the PICS working group.

42 http://www.w3.org/hypertext/WWW/PICS/

43 E-mail is often referred to as the "killer ap" (application) for children. How children use computers was a topic that was discussed at the "TECHNO Kids" and "Digital Kids" conferences. Representatives from the industry presented their market research and focus group findings. "TECHNO Kids Conference," Chicago, IL, September 13, 1995.

44 NewView, a blocking software company, recently announced that it will be using advertising as one of 15 labeling criteria. According to NewView, "iscreen" can be used to block pages with ad banners and ordering information.

45 See CME/CFA's "Guidelines for the Collection and Tracking of Information from Children on the Global Information Infrastructure and in Interactive Media," submitted to the Federal Trade Commission on June 5, 1996, for detailed examples illustrating how these proposed guidelines work in practice.

46 The definition of commercial marketing purposes generally adopts the Direct Marketing Association's definition of "direct marketing purposes" in its Guidelines for Personal Information Protection (Aug. 1995).

47 Some sites have the ability to know which site a computer user has just visited. The previous site is called the "referring URL."

48 Persons herein includes individuals and incorporated groups.

49 See Direct Marketing Association's Guidelines for Ethical Business Practices, Article #3 (Apr. 1995).

50 Future electronic mechanisms might include digital signature systems or personal privacy software applications. However, to ensure valid parental consent is obtained, digital signature systems would have to accurately identify the computer user to assure that only a qualified parent or guardian consented to the disclosure and use of the child's information. Similarly, to constitute valid consent, personal privacy software applications must have a default of "no release of personal information." This "opt-in" approach would require parents to reconfigure the default if they want their children's personal information to be released.

 


1. Associate Professor, Ohio State University College of Law. My thanks to a number of colleagues for helpful conversations, and especially to Ted Janger for comments on a previous draft. Phone: (614) 292-2547; e-mail: swire.1@osu.edu; Web: www.osu.edu/units/law/swire.htm.

2. Assistance by Thomas Aust, Bruce Olcott and Jerome Wagner is gratefully acknowledged.

3. Research supported in part by NSF Grant SES-93-20481. Thanks to Pam Samuelson for providing useful comments on an earlier draft. Author's homepage and contact information available at http://www.sims.berkeley.edu/hal.

4. * The Center for Media Education (CME) is a nonprofit research and advocacy organization founded in 1991 to educate the public and policymakers about critical media policy issues. CME's Action for Children in Cyberspace project is designed to help ensure that children's needs are met in the new media environment. The Consumer Federation of America is the nation's largest consumer advocacy organization, composed of over 250 state and local groups with some 50 million members. Founded in 1968, CFA's mission is to represent the consumer interest before Congress, in courts, and at federal agencies.