The current progress in data collection and processing holds the potential to boost economic prosperity. Indeed, already nowadays many consumers benefit from personalized recommendations for movies, books, or other products as firms learn consumers personal preferences through data collection. More significantly, information about consumers' personal preference is a crucial driver of innovation because it allows firms to create new products that align more closely with consumer preferences. Thus, consumers, firms, and society as a whole stand to benefit substantially from the digitalization of consumer markets with its advanced data collection abilities.
However, in markets with imperfect competition data collection can also harm consumers, particularly when it enables a firm to learn a consumer's personal exact value for its product. The firm then benefits from charging a high personalized price to those consumers who value the product most. These consumers lose from the data collection as they end up paying higher prices than without the data collection. As low value consumers may however gain, the overall impact of such price discrimination on consumers is complex.
Given these complexities, a market-driven, indirect approach has been adopted: consumer consent regulation. Consumer consent regulation requires firms to either obtain explicit consent from consumers or to give consumers an explicit opt-out right. The regulation effectively grants consumers ownership rights over their information, thereby creating a market for data collection. Prominent examples are the European Union's General Data Protection Regulation (GDPR), its Digital Markets Act (DMA), or the California Consumer Privacy Act (CCPA).
The rationale behind the consent regulation is straightforward: Just as a firm will not engage in data collection that hurts its profits, a consumer will not consent to any data collection that hurts him as a consumer. This simple reasoning suggests that data collection that occurs with the consumer's consent must benefit both parties and, thus, increases aggregate surplus. Hence, consent regulation seems a panacea, ensuring data collection to the benefit of all.
My studies points out that the above reasoning is however incomplete as it fails to account for the firm's offer contingent on the consumer's refusal to consent. The implicit but erroneous assumption behind the reasoning is that by refusing data collection, the dissenting consumer receives the offer that would obtain without any data collection possibilities. However, the firm is strictly better of committing to a dissent offer that is worse to the consumer than if data collection were not possible.
As a result, the firm's commitment provides firms with a loophole. Firms just have to commit to an offer that is so unattractive that the consumer is better off consenting. It is therefore imperative to flank consumer consent regulation with additional measures to prevent an exploitation of this loophole.
From a pure theoretical perspective, the loophole is easily fixed. One simply extends consent regulation by the requirement that firms must provide to dissenting consumers the offer that mirrors the outcome that would exist without the possibility of data collection. This extension requires however that regulators understand the counterfactual scenario of a world without data collection. Such regulation is therefore informational demanding.
Regrettably, less demanding solutions such as forcing the firm to use only reasonable or sequential rational offers, are ineffective in closing the loophole. This is so because data collection makes private information verifiable and, as is well known in other contexts, private information that is verifiable tends to unravel and induces voluntary disclosure. As a result, sequential rational offers also undermine consent regulation. In particular, the offer that a consumer receives without any possibility of data collection is not sequential rational.
This study is published as a working paper in the Berlin School of Economics Discussion Papers:
Strausz, R. (2024). Consumer Consent Regulation (Berlin School of Economics Discussion No. 53), Berlin School of Economics. (https://doi.org/10.48462/opus4-5654)
