MARKET - Economics - PRIVACY - Introduction and Basics


Introduction to the Economics of Privacy

The economics of privacy applies tools of economics to the analysis of privacy problems. These problems can either be related to a generic form of privacy or to personal privacy. Privacy is generic if it is related to an imbalance in the information distribution or publicity of the data, i.e. one market participant holds information in private that the other does not have. Privacy is personal if it is linked to one specific individual who is identified or identifiable.

Personal privacy relates to discrimination power of information, i.e. to the power of singling an identifiable of identified individual out of an anonymous mass. For personal privacy it is important that individuals hold private information that is connected to their identity (Jentzsch et al. 2012).

And conversely anonymity is the state of not being identifiable within a set of subjects, the so-called anonymity set (Pfitzmann and Köhntopp 2000).

The economics of privacy focuses on incentives and actions of firms and consumers with respect to personal data. At the core are the positive or negative welfare effects arising from the disclosure of personal data. Privacy economics focuses on the trade-offs of actors, their strategies, as well as market outcomes and market failures.

The research field also includes questions in competition if firms start to personalize products or services and/or prices, while facing consumers that are heterogeneous in privacy preferences. The economic impact of government regulation is analysed as well.


Personal Data: A Peculiar Good?

Personal data could be a peculiar good, because the combination of certain characteristics lead to complex economic problems. Compared to traditional goods personal data has been described as 'intangible asset' (OECD 2013: 10). It consists of the following properties:


  • Intangibility: personal information is not bound to a specific medium, but can be stored in different media;


  • Divisibility: personal information can be shared (i.e. two or more persons may hold the same piece on information);


  • Non-rivalry: If one person consumes the information, the informational content is not reduced and another person can consume it as well. Information is not a scarce resource in the traditional sense, but the material it is bound to is scarce;


  • Non-excludability: Once information is produced (collected), it is difficult to perfectly exclude others from using it;


  • Identity-relation: Personal information reveals either completely or partially the (psychological) identity. It then introduces psychological effects that alter the utility function of individuals compared to the standard utility under anonymity; and


  • Information externalities: The combination of different pieces of information can give rise to inferences (about income, intelligence, etc.). Moreover, externalities exist, where the revelation of others impact on an individual’s welfare.


These properties give rise to a number of problems once information is traded in a market environment.


The Legal Concept of Personal Data

The current legal definition of personal information is stated in Article 2 of the EU Data Protection Directive:

(...) 'personal data' shall mean any information relating to an identified or identifiable natural person ('data subject'); an identifiable person is one who can be identified, directly or indirectly, in particular by reference to an identification number or to one or more factors specific to his physical, physiological, mental, economic, cultural or social identity;
This definition clearly states that personal data must be related to an identified or identifiable natural person.



The Economic Concept of Personal Data

The state of personal privacy arises with an asymmetric distribution of personal data between market participants, where one side privately holds personal information. Privacy is therefore a relationship of asymmetric distribution of personal data between market players.


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