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

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

Khim-Yong Goh, NUSKai-Lung Hui, HKUST

I.P.L. Png, NUS

WISSP, October 2010 2

Privacy and Regulation

• “Privacy is a fundamental right that people do care about.”

Pamela Jones Harbour, Commissioner of U.S. FTC

• Existing research has been lagging behind:– Surveys and laboratory experiments– Little empirical research about real behavior– Mostly study direct benefits/costs of privacy, not

externalities between consumers


Externalities

• How one person’s decision affect others– Pollution, public good, etc.

• Two types of externalities among consumers related to privacy– Preference externalities: How consumers’ product

preferences affect others– Strategic marketing avoidance: How consumers’

marketing avoidance efforts affect others


Research Objectives

• Using real registration data from the U.S. Do Not Call Registry: -– Identify the presence of preference externalities

vis-à-vis strategic marketing avoidance in the demand for privacy

– Draw implications on optimal government intervention and vendor responses


Theory – Preference Externalities

• Reasons for preference externalities– Fixed costs in retailing limited products– Incomplete information on consumer preferences

product configuration based on aggregate attributes, e.g., age and gender

– These apply equally well to direct marketing• Within-segment: demand when the size of the

same segment increases• Cross-segment: demand when the size of other

segments increases


Theory – Preference Externalities

• The larger the size of a demographic segment the more likely a person will find the products that she wants via direct marketing the less likely that she will sign up for DNC

• H1 (Preference externalities): Marketing avoidance in a particular demographic segment would decrease with the size of that segment


Theory – Strategic Marketing Avoidance

• Vendors ignore harms caused by solicitations• Consumers avoid marketing when the harms

exceed the benefits from direct marketing• Marketing avoidance facilities serve to “filter”

the population for vendors• What would vendors do when the population

becomes “richer”?• How would remaining consumers respond?


Theory – Strategic Marketing Avoidance

• In general, larger consumer segments stronger impact on vendors’ expected profits due to marketing avoidance stronger strategic complementarity

• H2 (Strategic marketing avoidance): Marketing avoidance in a particular demographic segment would increase with the size of that segment


The DNC Registry

• Fixed line and mobile, not business numbers• Telemarketers must check phone numbers

against DNC no less frequently than 31 days• Registrations were indefinite • Desirable characteristics

– Real observations of consumer choices– Free service, low sign up cost, and no competition– Covers entire USA; lots of variations in consumer

demographics across regions


Data Sources, Issues, etc.

• County- and MSA-level population data from U.S. Census Bureau

01

23

45

Reg

istr

atio

ns (

mill

ion

s)

0 10 20 30 40 50Week

Our equilibrium state


Preference Externalities: Evidence


Preference Externalities: Evidence


Marketing Avoidance: Evidence

• There was concomitant increase in consumer purchase of directly marketed items and marketing avoidance


Empirical Model

• DNC registration rates:

• With help of population data, specifically,

• Integrating the above equations,

-ve preference externalities+ve strategic marketing avoidance


ResultsSMA among high-income people

PE among less-educated people

SMA among Hispanics and non-Hispanics

SMA among non-Spanish-only speakers


Robustness

Different equilibrium states

Perhaps the effects were due to direct communications?

Maybe consumer heterogeneity mattered?


County-Level Markets

• DNC registration rates:

• Estimation equation,

• Within-segment parameters could be identified, but not cross-segment parameters


County-Level Markets: Results

Fairly consistent with the MSA-level results…


Summary of findings

• Strategic marketing avoidance: High income, age, Hispanic ethnicity, non-Spanish-only speaking consumers

• Preference externalities: Less educated consumers– Waldfogel (2003, RJE) and George and Waldfogel

(2003, JPE): Preference externalities among black, white, and Hispanic ethnicity, but not education in radio and newspaper markets

– Our (telemarketing) results are opposite


Implications (1)

• Evidence of strategic marketing avoidance low-value consumers opted out More profitable “market” for the vendors Opt out facilities could indeed be helpful to vendors!


Practical Suggestions

• Direct marketers should support “opt out” facilities because such facilities help refine marketing lists

• Once this is understood, there will be less need for government to offer such services

– Should not “over-respond” to such refinement of marketing lists

• (otherwise “profitable”) Consumers may strategically respond by opting out

• Possible exception on competition law so that direct marketers can agree to limit solicitations?


Implications (2)

• Preference externalities segmented by education either:– Telemarketers have not segmented markets by

education fine enough, or– Product customization is too low in that market

• Perhaps refine offering by education level?– Financial/investment services, or educational

services…


Concluding Remarks

• Evidence of externalities strong justification for government regulation of privacy– These are beyond “standard” reasons, such as

consumer myopia or protecting vulnerable segments, e.g., children


Thank you!

Documents

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