How Network Effects and Asymmetric Information Markets Lead Us to Give Away Personal Data
Despite growing concern and increased awareness over protection of personal information, there is a rise in the amount of information we are giving out to companies. Privacy concerns are not a new issue, and yet after all these years we have made limited progress on further protections for individual personal information. Social media platforms such as Facebook have regularly been in the news for excessive use of personal data and other privacy infringements, yet we have not seen a decrease in the user base in the slightest. When Facebook acquires WhatsApp, despite the widespread fears of the acquisitions impact on personal data, the number of WhatsApp users rose after the acquisition.
In an ideal world, we might have two markets for social media platforms, one where companies sell their service to users, and other where users sell their personal information to companies. However, what we are currently seeing is that the market price of personal information is 0, caused by the “all-or-nothing” business model of social media companies. We see how people who are willing to pay for the service and not sell their data don’t have the option in the current market, nor are there any options for users to sell only some bits of information. This is partly due to the asymmetric information of such a market. Users don’t know how much their information is worth to companies, and often underestimate its worth since it isn’t a tangible object. Since users expect their personal information to be less valuable than it is, and companies not willing to pay for it, the market settles at an equilibrium price of 0 even if companies are willing to pay a sizeable amount for users’ data.
Another reason for the inability to step away from social media is network effects. As we’ve seen in class, even if the number of users fall, the strong network effects of services such as social media platforms will eventually bring the user base back up to its equilibrium percentage. Thus, it becomes extremely difficult to break out of products with network effects. The users must drop sufficiently to drop below the stable equilibrium point and below an unstable equilibrium. This is especially difficult as increased personal data usage which might typically make the price of the service increase tend to be followed with more features (such as better personalization) which makes the service worth more and can possibly “cancel out” some of the negative effects of increasing the usage of personal data.
Sources:
https://promarket.org/2021/02/01/free-data-market-failure-digital-platforms/