consumers – Technology Liberation Front https://techliberation.com Keeping politicians' hands off the Net & everything else related to technology Tue, 20 Nov 2018 15:12:13 +0000 en-US hourly 1 6772528 Mercatus essays on innovation, entrepreneurialism & technological governance https://techliberation.com/2018/09/28/mercatus-essays-on-innovation-entrepreneurialism-technological-governance/ https://techliberation.com/2018/09/28/mercatus-essays-on-innovation-entrepreneurialism-technological-governance/#respond Fri, 28 Sep 2018 15:40:52 +0000 https://techliberation.com/?p=76387

In recent months, my colleagues and I at the Mercatus Center at George Mason University have published a flurry of essays about the importance of innovation, entrepreneurialism, and “moonshots,” as well as the future of technological governance more generally. A flood of additional material is coming, but I figured I’d pause for a moment to track our progress so far. Much of this work is leading up to my next on the freedom to innovate, which I am finishing up currently.

 

Some older essays on related topics

]]> https://techliberation.com/2018/09/28/mercatus-essays-on-innovation-entrepreneurialism-technological-governance/feed/ 0 76387 Important New White House Report Documents Costs of Occupational Licensing https://techliberation.com/2015/07/29/important-new-white-house-report-documents-costs-of-occupational-licensing/ https://techliberation.com/2015/07/29/important-new-white-house-report-documents-costs-of-occupational-licensing/#comments Wed, 29 Jul 2015 22:25:37 +0000 http://techliberation.com/?p=75633

Yesterday, the White House Council of Economic Advisers released an important new report entitled, “Occupational Licensing: A Framework for Policymakers.” (PDF, 76 pgs.) The report highlighted the costs that outdated or unneeded licensing regulations can have on diverse portions of the citizenry. Specifically, the report concluded that:

the current licensing regime in the United States also creates substantial costs, and often the requirements for obtaining a license are not in sync with the skills needed for the job. There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities,  and make it more difficult for workers to take their skills across State lines. Too often, policymakers do not carefully weigh these costs and benefits when making decisions about whether or how to regulate a profession through licensing.

The report supported these conclusions with a wealth of evidence. In that regard, I was pleased to see that research from Mercatus Center-affiliated scholars was cited in the White House report (specifically on pg. 34). Mercatus Center scholars have repeatedly documented the costs of occupational licensing and offered suggestions for how to reform or eliminate unnecessary licensing practices. Most recently, my colleagues and I have explored the costs of licensing restrictions for new sharing economy platforms and innovators. The White House report cited, for example, the recently-released Mercatus paper on “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem,’” which I co-authored with Christopher Koopman, Anne Hobson, and Chris Kuiper. And it also cited a new essay by Tyler Cowen and Alex Tabarrok on “The End of Asymmetric Information.”

Moreover, along with Christopher Koopman and Matt Mitchell, I recently submitted comments to the Federal Trade Commission for a sharing economy workshop. In those comments, as well as a recent paper on the same subject, we documented how occupational licensing rules were often “captured” by affected interests and are then used to discourage new forms of competition and innovation. This harms both consumers and workers by depriving them of new and better options. Many sharing economy operations are having great success in breaking down these barriers and proving that consumers and workers do better in an environment free of unnecessary and costly licensing restrictions. This suggests that consumer welfare would be improved even more by reforming other licensing regimes.

Mercatus has published dozens of other things related to this issue, many of which I have listed down below. Just recently, in fact, we published a new paper on “Breaking Down the Barriers: Three Ways State and Local Governments Can Improve the Lives of the Poor,” by economist Steven Horwitz. The report begins by documenting how “occupational licensure laws disproportionately burden the poor by requiring them to spend significant resources just to enter a market.” This is consistent with the findings from other Mercatus reports and other academic publications.

Anyway, check out the new White House report and, if you are serious about studying the issue of occupational licensing in more detail, you’ll want to take a closer look at some of these other Mercatus Center publications on the issue. The case for occupational licensing reform is strong and non-partisan, as the release of this White House report makes clear.

Mercatus Center publications and related material on occupational licensing & barriers to entry 

]]> https://techliberation.com/2015/07/29/important-new-white-house-report-documents-costs-of-occupational-licensing/feed/ 2 75633 What Should the FTC Do about State & Local Barriers to Sharing Economy Innovation? https://techliberation.com/2015/05/12/what-should-the-ftc-do-about-state-local-barriers-to-sharing-economy-innovation/ https://techliberation.com/2015/05/12/what-should-the-ftc-do-about-state-local-barriers-to-sharing-economy-innovation/#comments Tue, 12 May 2015 20:21:02 +0000 http://techliberation.com/?p=75549

The Federal Trade Commission (FTC) is taking a more active interest in state and local barriers to entry and innovation that could threaten the continued growth of the digital economy in general and the sharing economy in particular. The agency recently announced it would be hosting a June 9th workshop “to examine competition, consumer protection, and economic issues raised by the proliferation of online and mobile peer-to peer business platforms in certain sectors of the [sharing] economy.” Filings are due to the agency in this matter by May 26th. (Along with my Mercatus Center colleagues, I will be submitting comments and also releasing a big paper on reputational feedback mechanisms that same week. We have already released this paper on the general topic.)

Relatedly, just yesterday, the FTC sent a letter to Michigan policymakers about restricting entry by Tesla and other direct-to-consumer sellers of vehicles. Michigan passed a law in October 2014 prohibiting such direct sales. The FTC’s strongly-worded letter decries the state’s law as “protectionism for independent franchised dealers” noting that “current provisions operate as a special protection for dealers—a protection that is likely harming both competition and consumers.” The agency argues that:

consumers are the ones best situated to choose for themselves both the vehicles they want to buy and how they want to buy them. Automobile manufacturers have an economic incentive to respond to consumer preferences by choosing the most effective distribution method for their vehicle brands. Absent supportable public policy considerations, the law should permit automobile manufacturers to choose their distribution method to be responsive to the desires of motor vehicle buyers.

The agency cites the “well-developed body of research on these issues strongly suggests that government restrictions on distribution are rarely desirable for consumers” and the staff letter continues on to utterly demolish the bogus arguments set forth by defenders of the blatantly self-serving, cronyist law. (For more discussion of just how anti-competitive and anti-consumer these laws are in practice, see this January 2015 Mercatus Center study, “State Franchise Law Carjacks Auto Buyers,” by Jerry Ellig and Jesse Martinez.)

The FTC’s letter is another example of how the agency can take steps using its advocacy tools to explain to state and local policymakers how their laws may be protectionist and anti-consumer in character. Needless to say, this also has ramifications for how the agency approaches parochial restraints on entry and innovation affecting the sharing economy.

In our forthcoming Mercatus Center comments to the FTC for its June 6th sharing economy workshop, Christopher Koopman, Matt Mitchell, and I will address many issues related to the sharing economy and its regulation. Beyond addressing all five of the specific questions asked in the Commission’s workshop notice, we also include a discussion about “Federal Responses to Local Anticompetitive Regulations.” Down below I have reproduced the current rough draft of that section of our filing in the hope of getting input from others. Needless to say, the idea of the FTC aggressively using its advocacy efforts or even federal antitrust laws to address state and local barriers to trade and innovation will make some folks uncomfortable–especially on federalism grounds. But we argue that a good case can be made for the agency using both its advocacy and antitrust tools to address these issues. Let us know what you think.

 

 

The Federal Trade Commission possesses two primary tools to address public restraints of trade created by state and local authorities: advocacy and antitrust.[1]

Through its advocacy program, the Commission can provide specific comments to state and local officials regarding the effects of both proposed and existing regulations.[2] Commissioner Joshua Wright has noted that, “For many years, the FTC has used its mantle to comment on legislation and regulation that may restrain competition in a way that harms consumers.”[3] Thus, at a minimum, the Commission can and should shine light on parochial governmental efforts to restrain trade and limit innovation throughout the sharing economy.[4] By shining more light on state or local anti-competitive rules, the Commission will hopefully make governments, or their surrogate bodies (such as licensing boards), more transparent about their practices and more accountable for laws or regulations that could harm consumer welfare. However, to be successful, the Commission’s advocacy efforts depend upon the willingness of state and local legislators and regulators to heed its advice.[5]

The Commission has already used its advisory role in its recent guidance to state and local policymakers regarding the regulation of ridesharing services. The Commission noted then that “a regulatory framework should be responsive to new methods of competition,” and set forth the following vision regarding what it regards as the proper approach to parochial regulation of passenger transportation services:

Staff recommends that a regulatory framework for passenger vehicle transportation should allow for flexibility and adaptation in response to new and innovative methods of competition, while still maintaining appropriate consumer protections. [Regulators] also should proceed with caution in responding to calls for change that may have the effect of impairing new forms or methods of competition that are desirable to consumers. . . .  In general, competition should only be restricted when necessary to achieve some countervailing procompetitive virtue or other public benefit such as protecting the public from significant harm.[6]

This represents a reasonable framework for addressing concerns about parochial regulation of the sharing economy more generally.

Unfortunately, in areas relevant to the regulation of the sharing economy (e.g., taxicab regulations and rules governing home and apartment rentals) anticompetitive regulations have remained on the books—and in some instances have expanded—in spite of more than 30 years of Commission comment and advocacy.[7]  In fact, as Public Citizen noted in a recent Supreme Court filing:

[M]any more occupations are regulated than ever before, and most boards doing the regulating—in both traditional and new professions—are dominated by industry members who compete in the regulated market. Those board member-competitors, in turn, commonly engage in regulation that can be seen as anticompetitive self-protection. The particular forms anticompetitive regulations take are highly varied, the possibilities seemingly limited only by the imaginations of the board members.[8]

In these instances, the Commission’s antitrust enforcement authority may need to be utilized when its advocacy efforts fall short with regard to regulations that favor incumbents by limiting competition and entry.[9] Many academics have endorsed expanded antitrust oversight of public barriers to trade and innovation.[10] As Commissioner Wright has argued, “the FTC is in a good position to use its full arsenal of tools to ensure that state and local regulators do not thwart new entrants from using technology to disrupt existing marketplace.”[11] He notes specifically that he is “quite confident that a significant shift of agency resources away from enforcement efforts aimed at taming private restraints of trade and instead toward fighting public restraints would improve consumer welfare.”[12] We agree.

The Supreme Court’s recent decision in North Carolina State Board of Dental Examiners v. Federal Trade Commission made it clear that local authorities cannot claim broad immunity from federal antitrust laws.[13] This is particularly true, the Court noted, “where a State delegates control over a market to a nonsovereign actor,” such as a professional licensing board consisting primarily of members of the affected interest being regulated.[14] “Limits on state-action immunity are most essential when a State seeks to delegate its regulatory power to active market participants,” the Court held, “for dual allegiances are not always apparent to an actor and prohibitions against anticompetitive self-regulation by active market participants are an axiom of federal antitrust policy.”[15]

The touchstone of this case and the Court’s related jurisprudence in this area is political accountability.[16] State officials must (1) “clearly articulate” and (2) “actively supervise” licensing arrangements and regulatory bodies if they hope to withstand federal antitrust scrutiny.[17] The Court clarified this test in N.C. Dental holding that “the Sherman Act confers immunity only if the State accepts political accountability for the anticompetitive conduct it permits and controls.”[18] In other words, if state and local officials want to engage in protectionist activities that restrain trade in pursuit of some other countervailing objective, then they need to own up to it by being transparent about their anticompetitive intentions and then actively oversee the process after that to ensure it is not completely captured by affected interests.[19]

Some might argue that this does not go far enough to eradicate anti-competitive barriers to trade at the state or local level that could restrain the innovative potential of the sharing economy. While that may be true, some limits on the Commission’s federal antitrust discretion are necessary to avoid impinging upon legitimate state and local priorities.

Over time, it is our hope that by empowering the public with more options, more information and better ways to shine light on bad actors, the sharing economy will continue to make many of those old regulations unnecessary. Thus, in line with Commissioner Maureen Ohlhausen’s wise advice, the Commission should encourage state and local officials to exercise patience and humility as they confront technological changes that disrupt traditional regulatory systems.[20]

But when parochial regulators engage in blatantly anti-competitive activities that restrain trade, foster cartelization, or harm consumer welfare in other ways, the Commission can act to counter the worst of those tendencies.[21] The Commission’s standard of review going forward was appropriately articulated by Commissioner Wright recently when he noted that, “in the context of potentially disruptive forms of competition through new technologies or new business models, we should generally be skeptical of regulatory efforts that have the effect of favoring incumbent industry participants.”[22]

Such parochial protectionist barriers to trade and innovation will become even more concerning as the potential reach of so many sharing economy businesses grows larger. The boundary between intrastate and interstate commerce is sometimes difficult to determine for many sharing economy platforms. Clearly, much of the commerce in question occurs within the boundaries of a state or municipality, but sharing economy services also rely upon Internet-enabled platforms with a broader reach. To the extent state or local restrictions on sharing economy operations create negative externalities in the form of “interstate spillovers,” the case for federal intervention is strengthened.[23] It would be preferable if Congress chose to deal with such spillovers using its Commerce Clause authority (Art. 1, Sec. 8 of the Constitution),[24] but the presence of such negative externalities might also bolster the case for the Commission’s use of antitrust to address parochial restraints on trade.

[1]     See Maureen K. Ohlhausen, Reflections on the Supreme Court’s North Carolina Dental Decision and the FTC’s Campaign to Rein in State Action Immunity, before the Heritage Foundation, Washington, DC, March 31, 2015, at 19-20.

[2]     Id., at 20. (“The primary goal of such advocacy is to convince policymakers to consider and then minimize any adverse effects on competition that may result from regulations aimed at preventing various consumer harms.”) Also see James C. Cooper and William E. Kovacic, “U.S. Convergence with International Competition Norms: Antitrust Law and Public Restraints on Competition,” Boston University Law Review, Vol. 90, No. 4, (August 2010): 1582, “Competition advocacy helps solve consumers’ collective action problem by acting within the regulatory process to advocate for regulations that do not restrict competition unless there is a compelling consumer protection rationale for imposing such costs on citizens.”).

[3]     Joshua D. Wright, “Regulation in High-Tech Markets:  Public Choice, Regulatory Capture, and the FTC,” Remarks of Joshua D. Wright Commissioner, Federal Trade Commission at the Big Ideas about Information Lecture Clemson University, Clemson, South Carolina, April 2, 2015, at 15, https://www.ftc.gov/public-statements/2015/04/regulation-high-tech-markets-public-choice-regulatory-capture-ftc.

[4]     Cooper and Kovacic, “U.S. Convergence with International Competition Norms,” at 1610, (“Competition agencies could devote greater resources to conduct research to measure the effects of public policies that restrict competition. A research program could accumulate and analyze empirical data that assesses the consumer welfare effects of specific restrictions. Such a program could also assess whether the stated public interest objectives of government restrictions are realized in practice.”)

[5]     Cooper and Kovacic, “U.S. Convergence with International Competition Norms,” at 1582, (“The value of competition advocacy should be measured by (1) the degree to which comments altered regulatory outcomes times (2) the value to consumers of those improved outcomes. For all practical purposes, however, both elements are difficult to measure with any degree of certainty.”).

[6]     Federal Trade Commission, Staff Comments Before the Colorado Public Utilities Commission In The Matter of The Proposed Rules Regulating Transportation By Motor Vehicle, 4 Code of Colorado Regulations, (March 6, 2013), http://ftc.gov/os/2013/03/130703coloradopublicutilities.pdf.

[7]     Marvin Ammori, “Can the FTC Save Uber,” Slate, March 12, 2013, http://www.slate.com/articles/technology/future_tense/2013/03/uber_lyft_sidecar_can_the_ftc_fight_local_taxi_commissions.html (noting that, “not only does the FTC have the authority to take these cities to impartial federal courts and end their anticompetitive actions; it also has deep expertise in taxi markets and antitrust doctrines.”) Also see, Edmund W. Kitch, “Taxi Reform—The FTC Can Hack It,” Regulation, May/June 1984, http://object.cato.org/sites/cato.org/files/serials/files/regulation/1984/5/v8n3-3.pdf.

[8]     Brief of Amici Curiae Public Citizen in Support of Respondent, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 2014): 24.

[9]     Brief of Antitrust Scholars as Amici Curiae in Support of Respondent, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 6, 2014): 24, (“Antitrust review is entirely appropriate for curbing the excesses of occupational licensing because the anticompetitive effect has a similar effect on the market—and in particular consumers—as does traditional cartel activity.”)

[10]   See Mark A. Perry, “Municipal Supervision and State Action Antitrust Immunity,” The University of Chicago Law Review, Vol. 57, (Fall 1990): 1413-1445; William J. Martin, “State Action Antitrust Immunity for Municipally Supervised Parties,” The University of Chicago Law Review, Vol. 72, (Summer, 2005): 1079-1102; Jarod M. Bona, “The Antitrust Implications of Licensed Occupations Choosing Their Own Exclusive Jurisdiction,” University of St. Thomas Journal of Law & Public Policy, Vol 5, (Spring 2011): 28-51; Ingram Weber “The Antitrust State Action Doctrine and State Licensing Boards,” The University of Chicago Law Review, Vol. 79, (2012); Aaron Edlin and Rebecca Haw, “Cartels by Another Name:  Should Licensed Occupations Face Antitrust Scrutiny?,” University of Pennsylvania Law Review, Vol. 162, (2014): 1093-1164.

[11]   Wright, “Regulation in High-Tech Markets,” at 28-9.

[12]   Wright, “Regulation in High-Tech Markets,” at 29.

[13]   North Carolina State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101 (2015).

[14]   Id.

[15]   Id. Also see Edlin & Haw, “Cartels by Another Name,” at 1143, (“Who could seriously argue that an unsupervised group of competitors appointed to regulate their own profession can be counted on to neglect their selfish interests in favor of the state’s?”); Brief Amicus of the Pacific Legal Foundation and Cato Institute, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 2014): 3, (“Antitrust immunity for private parties who act under color of state law is especially problematic, given that anticompetitive conduct is most likely to occur when private parties are in a position to exploit government’s regulatory powers.”)

[16]   See Maureen K. Ohlhausen, Reflections on the Supreme Court’s North Carolina Dental Decision and the FTC’s Campaign to Rein in State Action Immunity, before the Heritage Foundation, Washington, DC, March 31, 2015, at 16, https://www.ftc.gov/public-statements/2015/03/reflections-supreme-courts-north-carolina-dental-decision-ftcs-campaign, (“states need to be politically accountable for whatever market distortions they impose on consumers.”); Edlin & Haw, “Cartels by Another Name,” at 1137, (“political accountability is the price a state must pay for antitrust immunity.)

[17]   See Federal Trade Commission, Office of Policy and Planning, Report of the State Action Task Force (2003): 54, (“clear articulation requires that a state enunciate an affirmative intent to displace competition and to replace it with a stated criterion. Active supervision requires the state to examine individual private conduct, pursuant to that regulatory regime, to ensure that it comports with that stated criterion. Only then can the underlying conduct accurately be deemed that of the state itself, and political responsibility for the conduct fairly placed with the state.”) This test has been developed and refined in a variety of cases over the past 35 years. See: California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980); Cmty. Comm’ns Co., Inc. v. City of Boulder, 455 U.S. 40, 48-51 (1982); City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365 (1991); FTC v. Ticor Title Ins. Co., 504 U.S. 621 (1992).

[18]   North Carolina State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101 (2015).

[19]   Edlin & Haw, “Cartels by Another Name,” at 1156. (“Requiring that the state place its imprimatur on regulation is at least better than the status quo, in which states too often delegate self-regulation to professionals and walk away.”) See also North Carolina State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101 (2015) (“[Federal antitrust] immunity requires that the anticompetitive conduct of nonsovereign actors, especially those authorized by the State to regulate their own profession, result from procedures that suffice to make it the State’s own.”).

[20]  Maureen K. Ohlhausen, Commissioner, Fed. Trade Commission, “Regulatory Humility in Practice,” Remarks of the American Enterprise Institute, Washington, D.C. (April 1, 2015).

[21]   Edlin & Haw, “Cartels by Another Name,” at 1094, (“state action doctrine should not prevent antitrust suits against state licensing boards that are comprised of private competitors deputized to regulate and to outright exclude their own competition, often with the threat of criminal sanction.”). See also Brief Amicus of the Pacific Legal Foundation and Cato Institute, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 2014): 2, 21, http://www.americanbar.org/content/dam/aba/publications/supreme_court_preview/BriefsV4/13-534_resp_amcu_plf-cato.authcheckdam.pdf, (noting that courts “should presume strongly against granting state-action immunity in antitrust cases.  It makes little sense to impose powerful civil and criminal punishments on private parties who are deemed to have engaged in anti-competitive conduct, while exempting government entities—or, worse, private parties acting under the government’s aegis—when they engage in the exact same conduct. . . . “Whatever one’s opinion of antitrust law in general, there is no justification for allowing states broad latitude to disregard federal law and erect private cartels with only vague instructions and loose oversight.”)

[22]   Wright, “Regulation in High-Tech Markets,” at 7.

[23]   FTC, Report of the State Action Task Force, 44, (“an unfortunate gap has emerged between scholarship and case law. Although many of the leading commentators have expressed serious concern regarding problems posed by interstate spillovers, their thinking has yet to take root in the law. Such spillovers undermine both economic efficiency and some of the same political representation values thought to be protected by principles of federalism.”); Brief Amicus of the Pacific Legal Foundation and Cato Institute, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 2014): 13, (“Allowing states expansive power to exempt private actors from antitrust laws would also disrupt national economic policy by encouraging a patchwork of state-established entities licensed to engage in cartel behavior. This would disrupt interstate investment and consumer expectations, and would have spillover effects across state lines.”) Cooper and Kovacic, “U.S. Convergence with International Competition Norms,” at 1598, (“When a state exports the costs attendant to its anticompetitive regulatory scheme to those who have not participated in the political process, however, there is no political backstop; arguments for immunity based on federalism concerns are severely weakened, if not wholly eviscerated, in these situations.”

[24]   See Adam Thierer, The Delicate Balance: Federalism, Interstate Commerce, and Economic Freedom in the Technological Age (Washington, DC: The Heritage Foundation, 1998): 81-118.

]]> https://techliberation.com/2015/05/12/what-should-the-ftc-do-about-state-local-barriers-to-sharing-economy-innovation/feed/ 2 75549 The Debate over the Sharing Economy: Talking Points & Recommended Reading https://techliberation.com/2014/09/26/the-debate-over-the-sharing-economy-talking-points-recommended-reading/ https://techliberation.com/2014/09/26/the-debate-over-the-sharing-economy-talking-points-recommended-reading/#comments Fri, 26 Sep 2014 15:40:11 +0000 http://techliberation.com/?p=74792

The sharing economy is growing faster than ever and becoming a hot policy topic these days. I’ve been fielding a lot of media calls lately about the nature of the sharing economy and how it should be regulated. (See latest clip below from the Stossel show on Fox Business Network.) Thus, I sketched out some general thoughts about the issue and thought I would share them here, along with some helpful additional reading I have come across while researching the issue. I’d welcome comments on this outline as well as suggestions for additional reading. (Note: I’ve also embedded some useful images from Jeremiah Owyang of Crowd Companies.)

1) Just because policymakers claim that regulation is meant to protect consumers does not mean it actually does so.

  1. Cronyism/ Rent-seeking: Regulation is often “captured” by powerful and politically well-connected incumbents and used to their own benefit. (+ Lobbying activity creates deadweight losses for society.)
  2. Innovation-killing: Regulations become a formidable barrier to new innovation, entry, and entrepreneurism.
  3. Unintended consequences: Instead of resulting in lower prices & better service, the opposite often happens: Higher prices & lower quality service. (Example: Painting all cabs same color destroying branding & ability to differentiate).

2) The Internet and information technology alleviates the need for top-down regulation & actually does a better job of serving consumers.

  1. Ease of entry/innovation in online world means that new entrants can come in to provide better options and solve problems previously thought to be unsolvable in the absence of regulation.
  2. Informational empowerment: The Internet and information technology solves old problem of lack of consumer access to information about products and services. This gives them monitoring tools to find more and better choices. (i.e., it lowers both search costs & transaction costs). (“To the extent that consumer protection regulation is based on the claim that consumers lack adequate information, the case for government intervention is weakened by the Internet’s powerful and unprecedented ability to provide timely and pointed consumer information.” – John C. Moorhouse)
  3. Feedback mechanisms (product & service rating / review systems) create powerful reputational incentives for all parties involved in transactions to perform better.
  4. Self-regulating markets: The combination of these three factors results in a powerful check on market power or abusive behavior. The result is reasonably well-functioning and self-regulating markets. Bad actors get weeded out.
  5. Law should evolve: When circumstances change dramatically, regulation should as well. If traditional rationales for regulation evaporate, or new technology or competition alleviates need for it, then the law should adapt.

3) Sharing economy has demonstrably improved consumer welfare. It provides:

  1. more choices / competition
  2. more service innovation / differentiation
  3. better prices
  4. higher quality services  (safety & cleanliness /convenience / peace of mind)
  5. Better options & conditions for workers

4) If we need to “level the (regulatory) playing field,” best way to do so is by “deregulating down” to put everyone on equal footing; not by “regulating up” to achieve parity.

  1. Regulatory asymmetry is real: Incumbents are right that they are at disadvantage relative to new sharing economy start-ups.
  2. Don’t punish new innovations for it: But solution is not to just roll the old regulatory regime onto the new innovators.
  3. Parity through liberalization: Instead, policymakers should “deregulate down” to achieve regulatory parity. Loosen old rules on incumbents as new entrants challenge status quo.
  4. “Permissionless innovation” should trump “precautionary principle” regulation: Preemptive, precautionary regulation does not improve consumer welfare. Competition and choice do better. Thus, our default position toward the sharing economy should be “innovation allowed” or permissionless innovation.
  5. Alternative remedies exist: Accidents will always happen, of course. But insurance, contracts, product liability, and other legal remedies exist when things go wrong. The difference is that ex post remedies don’t discourage innovation and competition like ex ante regulation does. By trying to head off every hypothetical worst-case scenario, preemptive regulations actually discourage many best-case scenarios from ever coming about.

5) Bottom line = Good intentions only get you so far in this world.

  1. Just because a law was put on the books for noble purposes, it does not mean it really accomplished those goals, or still does so today.
  2. Markets, competition, and ongoing innovation typically solve problems better than law when we give them a chance to do so.

[P.S. On 9/30, my Mercatus Center colleague Matt Mitchell posted this excellent follow-up essay building on my outline and improving it greatly.]

Sharing Economy Taxonomy-001

Why People Use Sharing Services Source: Jeremiah Owyang, Crowd Companies

Additional Reading

]]> https://techliberation.com/2014/09/26/the-debate-over-the-sharing-economy-talking-points-recommended-reading/feed/ 2 74792 Big Data, Innovation, Competitive Advantage & Privacy Concerns https://techliberation.com/2012/04/27/big-data-innovation-competitive-advantage-privacy-concerns/ https://techliberation.com/2012/04/27/big-data-innovation-competitive-advantage-privacy-concerns/#comments Fri, 27 Apr 2012 19:03:05 +0000 http://techliberation.com/?p=41019

This morning I spoke at a U.S. Chamber of Commerce event on “Responsible Data Uses: Benefits to Consumers, Businesses and the Economy.” In preparing for the event, I dusted off some old working notes for speeches I had delivered at other events about privacy policy and “big data” and expanded them a bit to account for recent policy developments. For what it’s worth, I figured I would post those notes here.  (I apologize about the informality but I never write out my speeches, I just work from bullet points.)

—————–

Benefits of “Big Data”

  • “big data” has numerous micro- and macroeconomic benefits
  • Micro benefits:
    • data aggregation of all varieties has powerful social and economic benefits that are sometimes invisible to consumers and citizens but are nonetheless enjoyed by them
    • big data can positively impact the 3 key micro variables – quality, quantity & price – and benefit consumers / citizens in the process
  • Macro benefits:
    • Data is the lifeblood of the information economy and it has an increasing bearing on the global competitiveness of companies and countries
    • In the old days, when we talked about comparative and competitive advantage, the focus was on natural resources, labor, and capital.
    • Today, we increasingly talk about another variable: information
    • Data is increasing one of the most important resources that can benefit economic growth, innovation, and the competitive advantage of firms and nations.

Privacy Concerns

  • of course, “big data” also raises big privacy concerns for many groups and individuals
  • this has led to calls for regulatory action and virtually all levels of government – federal, state, local, and international – are considering expanded controls on data collection and aggregation

America’s Privacy Regime

  • I want to address what I regard as the most powerful myth that governs this debate
  • namely, I speak of the myth that America doesn’t have a privacy framework that can balance these goals and concerns about “big data” and data collection in general
  • we hear various advocates say that America needs a new privacy regime, and many of these advocates suggest that that regime should more like Europe’s

Europe’s Regime

  • first, what is that European regime?
    • a more preemptive top-down approach / data “directives” / stringent requirements on data use
    • basically, under the EU regime, privacy trumps almost all other considerations, regardless of cost or complexity.
    • It’s more of a “Mother, May I” regime in which innovation needs to be “permissioned”
  • what’s wrong with European approach?
    • We can relate this back to the question of competitive advantage
    • The European approach leaves less room for innovative uses of data and ongoing marketplace experimentation
    • There’s also some evidence that this regime might influence industry structure and competitiveness as well as the quality and quantity of choices for the consumer
    • Anecdotally-speaking, we can ask ourselves this simple question: Can any of us name a global leader in the modern digital economy that was born in Europe?
    • I suppose there are a few, but I struggle to name them
    • Now, why is that?
    • It could be high taxes and the lack of healthy market for venture capital.
    • But it also must have something to do with regulatory structure that Europe has adopted.

America’s Current Advantages

  • Regardless, here’s what we do know: America’s digital economy innovators and social media operators are household names across the globe. Our firms are the envy of the world
  • Moreover, while many sectors of the U.S. economy are struggling, I bet if you stopped the average Joe in the street and asked them to name one sector of America’s economy that is currently thriving and an example of innovation that others should emulate, most of them would probably mention information technology and the digital economy.
  • Again, many factors may contribute to our current success relative to Europe but certainly our “light-touch” legal and regulatory approach must have had some bearing on that outcome

America’s Privacy Regime

  • So, what exactly is America’s privacy regime?
  • Again, some say we don’t have one and that regulation is, therefore, needed
  • I beg to differ
  • America does have a privacy regime; it is one that is:
    • governed by a set of evolutionary norms,
    • ongoing online marketplace interactions and experiments, contractual negotiations,
    • public and press pressures,
    • self-regulatory systems,
    • educational efforts and user empowerment,
    • personal responsibility,
    • and targeted legal enforcement and the use of state torts when true harms can be demonstrated.
  •   compared with Europe, our legal regime:
    • More bottom-up enforcement
    • Issue-specific / Sectoral approach to addressing
    • Relies on common law / case law / torts
    • States have role; often more stringent than fed law
    • evolving industry Self-regulation
  • That’s been the uniquely American approach to privacy protection and we should not abandon it lightly.

It’s the Same Regime We’ve Used to Address Online Safety

  • Importantly, it’s largely the same approach we have taken in this country toward online speech and child safety matters.
  • There, too, we have focused on what I call the “3-E” approach:
    • Education
    • Empowerment, and
    • Enforcement against particularly bad apples
  • Thus, in both the online child safety space as well as the privacy policy space, we have made great strides in pushing both personal responsibility and corporate responsibility as the first line of defense, not the last.
  • Now, it has always been true, and will always be the case, that “more can be done.”
  • Consumers could do more: We need to constantly encourage consumers to take more care to protect the personal data they care most about and to take steps to safeguard that which they do not want collected in the first place
  • Companies could do more: And we also need to constantly encourage companies who collect data to take greater steps to:
    • first consider asking permission to collect and use that data
    • second, to be transparent about what data they are collection and what they are using it for
    • and third, to ensure adequate safeguards are in place to guard against unauthorized use of that data

The Difference between the Traditional American Model & the Emerging “Co-Regulatory” Model

  • in a sense, this vision tracks the Obama Administration’s proposed model for privacy and data collection
  • but here’s the difference: the Obama Administration wants to force this process in a more heavy-handed way by involving various federal agencies in the day-to-day management of how all these decisions get made
  • in essence, it’s a small but certain step toward the European model of “co-regulation”
    • government steers, industry rows
    • “multi-stakeholder process”
    • Everyone has a “seat at the table”
    • But we don’t need “a table” if the table is being set by government
    • there’s nothing wrong with truly voluntary “multi-stakeholder” processes, but when the government is the one setting the “seats at the table” and talking about enforcing the “codes” that the committee comes up with, it opens the door to a co-regulation model  that has some real dangers:
      • If every decision about how information is used or aggregated becomes the equivalent of a committee decision — with everyone “at the table” getting a vote or a veto – then it will almost certainly be the case that less innovation occurs
      • The process could lack traditional democratic accountability / due process if more of an “agency threats” model evolves out of this.  After all, if certain officials are in charge of who gets a “seat at the table” and also responsible for enforcing whatever is decided “at the table,” it raises the question of how much pressure they can bring to bear on the process. (File this under “regulation by raised eyebrow”).
      • Any way you cut it, regulation by committee (in this case, the “multistakeholder” process) could become the equivalent of a tax on innovation and have detrimental impacts on the quality and price of online services

Conclusion

  • For these reasons, we should instead continue to rely on the uniquely American model of privacy policy that balances diverse goals and values in a more spontaneous, evolutionary, and voluntary way without incessant government oversight and intervention.
  • Again, the traditional American model isn’t perfect and sometimes we will need targeted statutes, torts, and even FTC (Sec. 5) enforcement to handle the bad apples out there who cause the most serious problems in terms of privacy violations or data breeches.
  • But that more targeted approach to enforcement, along with the education and empowerment-based approaches I have outlined, can adapt to new challenges in this space and the child safety space while also ensuring our global competitive advantage is not sacrificed in the process.
  • To sum up: let’s not casually trade in the American model for Europe’s. America’s more flexible, evolutionary model of privacy protection has served us well so far and can adapt to balance competing needs without crushing our innovative information economy or America’s global competitiveness.

Additional Reading:

]]> https://techliberation.com/2012/04/27/big-data-innovation-competitive-advantage-privacy-concerns/feed/ 8 41019 op-ed: “Privacy Regulation and the ‘Free’ Internet” https://techliberation.com/2010/12/24/op-ed-privacy-regulation-and-the-free-internet/ https://techliberation.com/2010/12/24/op-ed-privacy-regulation-and-the-free-internet/#comments Fri, 24 Dec 2010 14:04:32 +0000 http://techliberation.com/?p=33859

[Here’s an oped of mine that recently ran on Reuters.  Readers will recognize many of these themes and arguments since I have developed them here on the TLF many times before.]

Privacy Regulation and the “Free” Internet

by Adam Thierer, Mercatus Center at George Mason University

Would you like to pay $20 a month for Facebook, or a dime every time you did a search on Google or Bing?  That’s potentially what is at stake if the Obama administration and advocates of stepped-up regulation of online advertising get their way.

The Internet feels like the ultimate free lunch.  Once we pay for basic access, a cornucopia of seemingly free services and content is at our fingertips.  But those services don’t just fall to Earth like manna from heaven.  What powers the “free” Internet are data collection and advertising. In essence, the relationship between consumers and online content and service providers isn’t governed by any formal contract, but rather by an unwritten  quid pro quo: tolerate some ads or we’ll be forced to charge you for service.  Most consumers gladly take that deal—even if many of them gripe about annoying or intrusive ads, at times.

Nonetheless, calls for regulation persist, especially as advertising grows more sophisticated.  More targeted forms of online advertising hold the promise of better ads more closely tailored to consumers’ interests.  But that also raises anxieties among some Web surfers who fear their privacy might be undermined by increased data collection or “tracking.”

To address those concerns, the Federal Trade Commission (FTC) and the Department of Commerce have stepped-up activity in this arena and has suggested that new rules may be needed. Earlier this month, the FTC released a report endorsing a new regulatory framework, including a so-called “Do Not Track” mechanism to allow easier consumer opt-outs of online data collection and advertising.  Last Thursday, the Commerce Department followed suit with a new report calling for expanded oversight and a new Privacy Policy Office within Commerce.  Meanwhile, discussion continues in Congress about a new “baseline” privacy law.

The stakes in the debate are significant since regulation could fundamentally alter the nature of online commerce and the future of how digital content and services are provided.  Curtailing data collection and online advertising could be killing the goose that lays the Internet’s golden eggs.  Such regulation will likely have a particularly deleterious impact on small publishers and service providers, who depend almost entirely upon online advertising.  In turn, this could curtail new entry and innovation—and new forms of speech and culture.

Some regulatory advocates don’t hide their desire to move the U.S. in the direction the European Union has charted with its “data directives” and more stringent forms of privacy regulation.  But America’s refusal thus far to walk down that more regulatory path offers scholars the chance to evaluate Europe’s more restrictive approach and study whether America’s lead in the global digital marketplace might be tied to its more “hands-off” approach to online regulation. A recent study by Avi Goldfarb and Catherine Tucker found that “after the [European Union’s] Privacy Directive was passed [in 2002], advertising effectiveness decreased on average by around 65 percent in Europe relative to the rest of the world.” They argue that because regulation decreases ad effectiveness, “this may change the number and types of businesses sustained by the advertising-supporting Internet.” Regulation of advertising and data collection for privacy purposes, it seems, can affect the global competitiveness of online firms.

Regulatory efforts will be complicated by the fact that privacy is a highly subjective condition and definitions of consumer “harm” vary widely.  Many of us don’t much worry about data collection or advertising online; we merrily go along our way surfing free sites, services, and content.  But a handful of vocal pro-regulatory privacy advocates and organizations have successfully convinced many policymakers that the hyper-sensitive concerns of a small minority should trump all other considerations.

Ironically, many of those privacy advocates bash copyright law and claim it is an information control regime, yet privacy regulation would constitute a stronger information control regime by creating the equivalent of copyright for personal information (which would, in turn, conflict mightily with the First Amendment).  In essence, privacy regulations limit the right of people to talk about other people, or communicate facts about them.  This raises serious free speech concerns and has particularly troubling ramifications for press freedoms.  Restrictions on advertising could also have an effect on non-commercial speech, such as political ads or non-profit communication.

Some proposed privacy regulations, such as a “Do Not Track” mandate, would also require a re-architecting of the Internet and the potential regulation of every Web browser to ensure compliance.  If our experience with attempting to eradicate email spam through regulation proves anything, it’s that such schemes are unlikely to work given the Net’s borderless nature.

There is a better path to balancing privacy interests and economic growth than through an onerous privacy regulatory regime. Educating and empowering consumers with more, and better, privacy-enhancing tools can help alleviate much of the concern about data collection or advertising intrusiveness.  The most-downloaded add-on for both the Firefox and Chrome web browsers is AdBlock Plus, which blocks advertising on most sites. A host of other tools are available to block or limit various types of data collection, and every major browser has privacy control tools and anonymous surfing modes to help users limit data collection.

Again, because privacy is a subjective condition, not everyone takes advantage of these empowerment tools.  The crucial point, however, is that the tools exist and they need not be perfect to be preferable to government regulation, which, in this case, could decimate the “free” Internet as we know it.

Adam Thierer is a senior research fellow at the Mercatus Center at George Mason University where he works with the Technology Policy Program. Thierer covers technology, media, Internet, and free speech policy issues with a particular focus in online child safety and digital privacy policy issues. The views expressed are his own.

]]> https://techliberation.com/2010/12/24/op-ed-privacy-regulation-and-the-free-internet/feed/ 2 33859 Smart-Sign Technology: Retail Marketing Gets Sophisticated, But Will Regulation Kill It First? https://techliberation.com/2010/01/12/smart-sign-technology-retail-marketing-gets-sophisticated-but-will-regulation-kill-it-first/ https://techliberation.com/2010/01/12/smart-sign-technology-retail-marketing-gets-sophisticated-but-will-regulation-kill-it-first/#comments Tue, 12 Jan 2010 21:29:37 +0000 http://techliberation.com/?p=25007

Today I appeared on CNBC [video here and embedded down below] to discuss concerns about emerging “smart-sign” technology, which could give rise to a new generation of interactive retail advertising and marketing efforts. This is in the news because, as Don Clark and Nick Wingfield report today in The Wall Street Journal (“Intel, Microsoft Offer Smart-Sign Technology: Retailers, Product Marketers Could Discern Viewer, Make Choices on What to Display and Transfer Coupons Via Phone“), Intel and Microsoft have announced that:

they will collaborate to help companies create and use new forms of digital signs. By exploiting Intel chips and Microsoft software, the companies hope to bring more interactivity to such devices and help retailers customized marketing offers to consumers. Signs equipped with cameras and specialized software could recognize the age, gender and height of people in front of them, and tell what products and images received the most attention, the companies said. By gathering information about which messages are more effective, they add, traditional retailers could develop marketing approaches that better counter Web-based competitors. “Every year retailers lose more ground to online [sellers], and they have to do something about that,” said Joe Jensen, general manager of Intel’s embedded computing division.

Down below, I have jotted down a couple of thoughts about the rise of “digital signage” and more targeted forms of retail marketing, only a few of which I was able to get across in this short TV spot. I think it’s an exciting new development for both retailers and consumers for the reasons I explain down below:

http://plus.cnbc.com/rssvideosearch/action/player/id/1383744249/code/cnbcplayershare

]]> https://techliberation.com/2010/01/12/smart-sign-technology-retail-marketing-gets-sophisticated-but-will-regulation-kill-it-first/feed/ 29 25007 Are Consumers Mindless Sheep? https://techliberation.com/2010/01/01/are-consumers-mindless-sheep/ https://techliberation.com/2010/01/01/are-consumers-mindless-sheep/#comments Fri, 01 Jan 2010 15:57:00 +0000 http://techliberation.com/?p=24736

sheepOne of the themes you come across again and again in public policy debates about privacy, advertising, marketing, or even free speech battles, is the notion that the public at large is made up of mindless sheep being duped at every turn.  And, as Berin Szoka and I noted in our paper “What Unites Advocates of Speech Controls & Privacy Regulation?” if you buy into the argument that consumers are basically that stupid then it logically follows that people cannot be trusted or left to their own devices. Thus, government must intervene and establish a baseline “community standard” on behalf of the entire citizenry to tell them what’s best for them.

But there are good reasons to question the premise that consumers are blind to efforts to persuade or influence them — regardless of what type of media content or communications efforts we are talking about.  I was recently reading Communication Power by Manuel Castells and liked what he had to say about how so many media critics make this false assumption. Castells rightly notes:

Interestingly enough, critical theorists of communication often espouse [a] one-sided view of the communications process. By assuming the notion of a helpless audience manipulated by corporate media, they place the source of social alienation in the realm of consumerist mass communication. And yet, a well-established stream of research, particularly in the psychology of communications, shows the capacity of people to modify the signified of the messages they receive by interpreting them according to their own cultural frames, and by mixing the messages from one particular source with their variegated range of communicative practices. (p. 127)

That’s exactly right, and it is even more true in an age of ubiquitous, interactive communications technologies. “The people formerly known as the audience” have the unprecedented ability to talk back, to compare notes, to collectively criticize and hold accountable those who previously held all the cards in the mass media age of the past.  Most consumers are perfectly capable of judging the merits of advertising, commercial messages, or other content on their own; they cast a skeptical eye toward most claims but process those claims alongside other counter-claims, independent judgments, informational inputs, and “cultural frames,” as Castells rightly argues.  We need to give the public some credit.

]]> https://techliberation.com/2010/01/01/are-consumers-mindless-sheep/feed/ 21 24736 The Negative Feedback Loop Begins https://techliberation.com/2009/11/17/the-negative-feedback-loop-begins/ https://techliberation.com/2009/11/17/the-negative-feedback-loop-begins/#comments Tue, 17 Nov 2009 14:50:28 +0000 http://techliberation.com/?p=23580

I wrote here a couple of months ago about the shady practice among a few Internet retailers of handing off customers who accept a “special offer” to a company that charges people a monthly fee for some kind of credit monitoring service. And I argued hopefully that maybe technologists and the Internet community could generate a response to this problem:

Being a smart, informed, and aggressive consumer is each person’s responsibility if a free market is to operate well. The alternative is a negative feedback loop in which government authorities protect us, we rely on that protection and stop policing retailers. Thereby we abandon the field of consumer protection to government authorities, who—try as they might—can never do as good a job for us as we can for ourselves.

The Senate Commerce Committee is having a hearing today on “Aggressive Sales Tactics on the Internet and Their Impact on American Consumers.”

]]> https://techliberation.com/2009/11/17/the-negative-feedback-loop-begins/feed/ 8 23580 Consumer Protection, Internet Style: ProFlowers.com https://techliberation.com/2009/08/25/consumer-protection-internet-style-proflowers-com/ https://techliberation.com/2009/08/25/consumer-protection-internet-style-proflowers-com/#comments Tue, 25 Aug 2009 18:51:41 +0000 http://techliberation.com/?p=20663

Our job here at TLF is generally to talk about policy as opinion leaders, but I tend to be a little campaign-y sometimes. When I see something I don’t like, I’ll use this platform to sound off about it.

It appears that ProFlowers.com engages in a shady practice: handing customers who accept a “special offer” from them to a company that charges people a monthly fee for what appears to be some kind of credit monitoring service. There are write-ups of varying depth and quality here, here, here, and here.

Question: Does the Internet provide enough feedback to suppress this practice? How could the e-commerce ecosystem be changed to alert people about this kind of thing ahead of time?

Being a smart, informed, and aggressive consumer is each person’s responsibility if a free market is to operate well. The alternative is a negative feedback loop in which government authorities protect us, we rely on that protection and stop policing retailers. Thereby we abandon the field of consumer protection to government authorities, who—try as they might—can never do as good a job for us as we can for ourselves.

Should we each run a “scam” search on new online businesses before we deal with them? Maybe so. But that’s a little clunky. With the popularity of Firefox plug-ins for problem solving around here, maybe one of the consumer review/complaint sites could develop a plug-in to provide people reviews of a retailer as they visit the site.

I hope that prompting a conversation around the apparent ProFlowers.com credit card ripoff scam will alert savvy shoppers to a risk of doing business with them. (For the sake of searchability, feel free to blog a little bit yourself about the apparent ProFlowers credit card ripoff scam.) Perhaps this discussion will also generate a systemic fix that preempts shady dealings of the type alleged here.

]]> https://techliberation.com/2009/08/25/consumer-protection-internet-style-proflowers-com/feed/ 19 20663 A Posterboy for Advertising’s Pro-Consumer Quid Pro Quo https://techliberation.com/2009/06/28/a-posterboy-for-advertisings-pro-consumer-quid-pro-quo/ https://techliberation.com/2009/06/28/a-posterboy-for-advertisings-pro-consumer-quid-pro-quo/#comments Sun, 28 Jun 2009 23:47:19 +0000 http://techliberation.com/?p=18962

The advocates of regulation pay lip service to the importance of advertising in funding online content and services but don’t seem to understand that this quid pro quo is a fragile one:  Tipping the balance, even slightly, could have major consequences for continued online creativity and innovation.

Michael-Mr-YogatoWho is this handsome young man and why does he have “Mr. Yogato Stamped Me!!!” on his forehead? More importantly, why does he look so darn happy?

Flashback: Earlier this week, my partner Michael (pictured) and I visited Mr. Yogato, a frozen yogurt shop in Washington’s Dupont Circle neighborhood which describes itself as “the FUNNEST yogurt experience you’ll ever have.”

Apart from serving exceptionally tasty frozen yogurt and letting customers play a vintage Nintendo, Mr. Yogato is famous for the eight “Rules of Yogato,” which offer discounts if users achieve certain feats, including:

  • Answering devilishly difficult trivia (10% off—or extra if you fail)
  • Reciting the Stirling battlefield speech from Braveheart in a great Scottish accent (20% off)

But the best discount, which Michael does every time (unless I’m there to help identify, say, countries that end in ‘L’), is offered for wearing the Yogato stamp on your forehead. Being stamped is, of course, almost as much fun as singing along to “Mr. Roboto” if you’re lucky enough to hear that played while you’re in the shop (10% off).  But the real fun is in engaging passersby on the street about the icy-sweet joys of Yogato. It’s also, of course, probably the most effective advertising Mr. Yogato could ever want.

So, the next time you hear Adam Thierer and I talk about the benefits of advertising, especially online, just remember that while there is no free lunch (nor free frozen yogurt), there is discounted frozen yogurt.  It’s a simple, obvious quid pro quo:  10% off in exchange for spreading the Gospel of Yogato.

The most obvious example of a  quid pro quos is the use of discount cards in grocery stores: Users receive discounts in exchange for having their purchases tracked, which allows advertisers to target advertising to them and the grocery store to better manage its inventory. Online, Microsoft’s Live search engine (now Bing) pioneered the use of rewarding users with “cashback” for purchases made through the search engine.

But the more significant quid pro quo online is indirect: users receive “free” content and services in exchange for seeing advertising and sharing data about their browsing habits, which makes advertising significantly better targeted, more effective for advertisers and therefore more profitable for online content publishers and service providers. As Adam and I noted in response to the FTC’s recently-released self-regulatory guidelines for “behavioral advertising” (now likely to be superseded by pre-emptive “privacy” legislation):

The advocates of regulation pay lip service to the importance of advertising in funding online content and services but don’t seem to understand that this quid pro quo is a fragile one: Tipping the balance, even slightly, could have major consequences for continued online creativity and innovation. [FTC] Commission Harbour talks about companies competing on privacy as a “non-price dimension”-and that is clearly a positive thing. In traditional economics, there are three primary variables that are considered when discussing industry competition and efforts to regulate market structures: price, quantity, and quality. But in the context of the Internet, where digital economics have relentlessly driven prices down to zero, and where advertising support has become the only viable business model for most providers of content and services, the price variable has largely been removed from the picture. This means-unless industry could somehow find a way to make pay-per-use, pay-per-view, or subscription-based models work in the future-that regulation of online advertising would have its most dramatic impact on the quantity and quality of content and services provided. Depending on how regulation is structured, therefore, it is possible that new privacy mandates would severely curtail the overall quantity of content and services offered-and greatly limit the ability of new providers to enter the market with innovative offerings. Alternatively, or perhaps additionally, companies would change the character of their offerings and water-down sophisticated services that cater to consumer demand; in other words, the quality of service would deteriorate. Bottom line: Something must give because there is no free lunch. Regulation is a giant game of economic whack-a-mole: Attempting to control one of the primary variables of price, quantity, or quality inevitably results in non-optimal adjustments in the other two variables. The absence of price as a variable in this context means there is one less variable for the government to control in the first place. Simply stated, stifling the evolution of the online advertising marketplace will likely result in fewer free online services and less content, less high-quality online services and content, or some combination of both…. Apart from a hardcore fringe who embrace the Marxist dogma that advertising is inherently deceptive and wasteful, most participants in this debate at least pay lip service to the economic importance of online advertising. One might therefore be lulled into a false sense of complacency that “sensible” regulation (or government-led co-regulation) would surely avoid crippling this dynamo. This widespread assumption calls to mind the famous quip of Chris Patten, last British Governor of Hong Kong, who paraphrased those who dismissed his concerns about the potentially negative effects of a Chinese take-over of the British colony in 1997, as follows: “It is unimaginable that the Chinese would kill such a goose.” To this, Patten responded, “Yet we wouldn’t need the metaphor of golden eggs and geese if history weren’t full of dead geese.” The dangers of regulation to the health of the Internet are real, but the ease with which government could disrupt the economic motor of the Internet (advertising) is not widely understood-and therein lies the true danger in this debate.

I think Mr. Yogato would understand this. Let’s hope Chairman Boucher and the folks on the Hill who seem to be so adamant about regulation do, too.

]]> https://techliberation.com/2009/06/28/a-posterboy-for-advertisings-pro-consumer-quid-pro-quo/feed/ 23 18962 Google’s Ad Preference Manager: One Small Step for Google, One Giant Leap for Privacy https://techliberation.com/2009/03/11/google%e2%80%99s-ad-preference-manager-one-small-step-for-google-one-giant-leap-for-privacy/ https://techliberation.com/2009/03/11/google%e2%80%99s-ad-preference-manager-one-small-step-for-google-one-giant-leap-for-privacy/#comments Wed, 11 Mar 2009 19:35:39 +0000 http://techliberation.com/?p=17382

Google’s new “Interest Based Advertising” (IBA) program represents the company’s first foray into what is generally called “Online Behavioral Advertising” (OBA):  In order to deliver more relevant advertising, Google will begin tailoring ads delivered through AdSense on the Google Content Network (GCN) and YouTube.com (but not Google.com).  This tailoring will be based on a profile of each user’s interests created by tracking their browsing activity across sites that use AdSense-but not search queries or other user information.  Until now, (i) AdSense has delivered essentially “contextual” advertising by choosing which ad to display on a page based on an algorithmic analysis of keywords on that page; and (ii) Google has tracked users’ browsing only for analytics purposes-to limit the number of times a user sees a particular ad (to prevent overexposure) and to allow sequencing of ads in campaigns where one ad must follow another. 

Google is sure to be attacked for crossing a “line in the sand” drawn by some privacy advocates between contextual and behavioral advertising-even though Google’s closest competitor, Yahoo!, already offers a similar program, and the concept in general is hardly new.  Google’s position as the leading search engine and third party ad-delivery network will no doubt cause paroxysms of privacy hysteria among those who consider targeted advertising inherently invasive, unfair or manipulative.

But those whose first priority is advancing consumer privacy, not advancing a political or regulatory agenda, should applaud Google for excluding sensitive categories and for putting the new Ad Preference Manager at the core of the company’s new IBA program.  The Ad Preference Manager sets a new “gold standard” for implementing the principles of Notice and Choice, which have formed the core of both OBA industry self-regulation and the various regulatory proposals made in recent years.  Indeed, Google has done precisely what Adam Thierer and I have called for:  giving consumers more granular control over their own privacy preferences by developing better tools.

How Google’s Ad Preference Manager Works

For years, debates about how OBA should be regulated (whether by industry or by government) have revolved around two key questions: 

  • Notice: How should consumers best be informed about the data that’s being collected about them, how it’s being used, by whom, and so on?
  • Choice: How should consumers be given the ability to opt-out of tracking for OBA purposes?

While there are significant philosophical disagreements about some aspects of these debates-such as whether the default should be opt-in or opt-out-much of the debate has come down to questions of implementation that may seem trivial or easily-solved to lay people:  Where should notice be provided?  If notice is provided in ads themselves, what should the link say and how big should it be?  By what technological means should users be able to opt-out of tracking?  Google has provided an elegantly simple solution to these questions. 

Google provides “notice” to users in two ways:

  • In the ads.  In the bottom left corner of each AdSense ad on sites in the GCN, users will see the URL for the advertiser’s website.  This is already the case for all text ads, but not for display ads.  In the bottom right corner of both display and text ads, users will see an “Ads by Google” link.  Thus, the ad itself provides the user notice of (i) who’s paying for the ad and (ii) who’s serving it. 
  • In the Ad Preference Manager.  If the user clicks the “Ads by Google” link, they will see which of the ~20 categories and ~600 subcategories have been associated with the tracking cookie in their browser.  Thus, Google provides notice to the user of what’s in their so-called “digital dossier.”

Google provides “choice” to the user in two ways:

  • Editing categories.  The Ad Preference manager not only shows the profile that has been algorithmically assembled of their likely interests, but it lets them decide for themselves which categories they’re really interested in.  If a user finds that they have been placed in the “Automotive > Motorcycles” category but actually owns a SUV, they could select “Automotive > Trucks & SUVs”-or no Automotive category at all.  
  • A persistent opt-out.  Users can decide to opt-out completely from having their data collected for IBA purposes.  That choice will be respected in the future, and will therefore be “persistent.”

The Persistent Opt-Out Plug-in

For roughly a decade, the OBA industry has operated under a self-regulatory scheme developed by the Network Advertising Initiative (NAI).  NAI lets users opt-out of receiving ads based on OBA targeting.  But privacy advocates have objected on three grounds:

First, privacy advocates argue that it’s currently too hard for users to find the NAI opt-out tool since users don’t know which ad network is serving which ads and there’s no obvious way to get from an ad to the opt-out option.  Google moots this argument by making its opt-out easily accessible to anyone who clicks on the “Ads by Google” link that appears beneath every IBA-targeted ad.

Second and most importantly, privacy advocates decry NAI’s opt-out because it isn’t “persistent”- i.e., it requires the placement of a special “opt-out cookie” on the user’s computer, which may be inadvertently deleted when users delete all their cookies.  Indeed, many users do precisely that on a regular basis through either their browser or antivirus software-thus erasing their own opt-out choice.  Google moots this argument too:  While Google’s opt-out also relies on a special opt-out cookie, Google has created an easily installed plug-in for the two most common Web browsers, Internet Explorer and Firefox, that ensures that the opt-out cookie is automatically recreated even if a user deletes their cookies.  For the Chrome and Safari Web browsers (which do not support plug-ins), Google has outlined a simple procedure whereby users can achieve the same result.

Third, many critics worry that any cookie-based opt-out mechanism still involves sending data to ad networks that the ad networks could use to track users-despite promises in their privacy policies not to do so.  Even though the FTC can enforce such policies, it may be difficult for users to determine what the ad networks are doing with the data they receive from users that have opted out of tracking.  Although Google’s system seems to be no different in this regard from how other NAI member companies handle opt outs, truly privacy-sensitive users could easily address this concern by configuring their Web browser to not send any data to these networks and/or not allow any persistent cookies, as we’ve discussed in our Privacy Solutions Series.   

A Superior Solution to a “Do-Not-Track” Registry

The privacy advocates who lambaste the inadequacies of the NAI opt-out system have demanded the creation of a government-run “Do-Not-Track” registry loosely modeled on-but very different in practice from-the FTC’s Do-Not-Call registry, by which over 170 million Americans have opted out of receiving telemarketing calls.  Google’s Ad Preference Manager provides a better system.

First, it proves that the “persistency” problem can be solved.  In fact, since Google’s plug-in is open source, these privacy advocates may be able to use it to create a browser plug-in that works for opt-out cookies from other NAI member companies.  Indeed, given how simple Google’s plug-in is, one wonders why they didn’t do this when NAI’s Opt-Out Tool was first made available.  Perhaps the technologists at these organizations have spent a little too much time developing elaborate regulatory solutions and too little time focusing on empowering users.  Or perhaps these organizations simply decided that creating such a tool would undercut their argument that only government intervention could protect users’ privacy.  Ironically, some of the organizations pushing Do-Not-Track have joined us in emphasizing the effectiveness of user empowerment tools in other contexts-such as online child protection, where parental control software offers a more effective alternative to government regulation of Internet content that also does less to restrict constitutionally protected speech.  Even more ironically, their Do-Not-Track proposal specifically calls for the development of browser-based tools to implement the government-maintained Do-Not-Track database.  In an era when anyone can write a browser plug-in that can achieve wild popularity (such as the roughly 43 million downloads of the Firefox plug-ins AdBlock Plus and NoScript), these advocacy organizations have little excuse for not practicing what they preach. 

Second, Google has set a new standard in both Notice-by including a link to the opt-out in every ad-and Choice-by respecting user’s opt-out preferences.  Other ad networks now face intense pressure to catch up with, or outpace, Google by implementing the same kind of Notice and Choice.  Indeed, NAI will now be expected to improve its own opt-out system with a browser plug-in capable of preserving opt-out preferences for all of its members’ ad networks.  To the extent that this plug-in might work better with cooperation from the ad networks, that cooperation should now be more forthcoming than ever. 

Third, if these privacy advocates’ real objection to any cookie-based opt-out system-whether the NAI opt-out tool or Google’s plug-in-is uncertainty as to whether opt-out preferences would really be respected by ad networks that continue to collect tracking data (as discussed above), who better than Google to lead the market in setting higher standards for privacy protection?  Ultimately, these standards will be, and should be, enforced by the FTC under its existing authority to punish unfair and deceptive trade practices.

What This Episode Says About Google

Some privacy advocates will argue that Google is just too big-and therefore too “scary”-to be allowed to engage in OBA, and may try to paint Google’s entry in the OBA marketplace as a net loss to privacy, notwithstanding the extremely pro-privacy way in which Google has implemented its “IBA” service.  But if this incident demonstrates anything about Google, it’s the following:

First, it’s no accident that Google is now leading the pack of third party ad networks by developing innovative solutions that respect consumer privacy.  Unlike most third party ad networks, Google is directly focused on the demands of consumers:  In addition to the ad network they acquired from DoubleClick, of course, Google offers consumers a wide array of other online services (search, email, maps, etc.).  Because these services (and their competitors) are all free, Google has to compete in what economists call “non-price terms”-such as privacy.  So, Google has a lot to lose by alienating its users and a lot to gain by being seen as a leader in privacy protection.  Would an independent DoubleClick have taken so much care to address privacy concerns?  As the developer of a competing search engine once said about the Internet search industry, ”you earn your right to be in business every day, page view after page view, click after click.”  

Second, it’s no accident that Google was a late-comer to the OBA market, lagging behind Yahoo! in particular.  The most likely reason Google has taken its time in rolling out an OBA product is that Google is subject to a unique level of scrutiny by privacy advocates by virtue of its size.  Being the “big kid on the block,” Google has to be especially careful not to appear to be “Big Brother.”  This reputational check on Google should allay some concerns about Google’s size.

Third, this episode also demonstrates the advantages of having a player like Google large enough to be able to singlehandedly set a new paradigm in privacy protection.  Google risks alienating some advertisers and publishers with its bold empowerment of users, but was willing to take those risks because of its incentives as a consumer-facing company and able to do so because of its leadership in the marketplace.  Uncomfortable as this reality may be for those who fret about antitrust issues and indeed for Google itself, the simple reality is that sometimes it takes “big dogs” to make self-regulatory systems truly effective.  For example, the video game industry’s highly effective content rating system has worked because the titans in that field were big enough to push through a tough system and keep it working.  Similarly, Microsoft has led the way for years in empowering users by offering in Internet Explorer the most sophisticated cookie management tools available in any browser, as we’ve discussed.  In a nutshell, privacy leadership requires scale. 

Conclusion

Google’s Ad Preference Manager, with its persistent opt-out plug-in, offers precisely the kind of robust opt-out that privacy advocates have always demanded.  Google deserves a rousing “Amen!” from privacy advocates.  But those who respond to this program by insisting that “more needs to be done on how to educate people and tell them how to opt out,” are right in two senses.  First, Google has shown other ad networks how to do more to empower users.  I am confident that they will rise to that challenge by continuing to refine self-regulation through technological innovation.  Second, this is by no means the last word in privacy protection from Google, which operates in the midst of continually-evolving privacy standards.  I expect Google and competing ad networks will continue to innovate in developing technologies that empower users to manage their own privacy-and that this competitive “race to the top” will improve online privacy protection in a broader sense beyond just advertising by putting pressure on other online service providers to improve their privacy practices and policies.

But I fear that too many privacy advocates will instead see this as just another reason for the government to intervene-perhaps because of fear of Google engaging in OBA or  because they think the government, not Google, should be developing privacy solutions.  Or perhaps they think Google’s system shows that a system of government-mandated solutions really could work.  To the contrary, Google’s approach is precisely the kind of innovation that would be discouraged by pre-emptive government regulation.  Worse, those who would freeze privacy protection in place would also freeze in place much of the Internet itself, precluding development of new business models that would compete with Google, allaying concerns about competition and benefiting consumers.  Why preclude broadband providers, for example, from figuring out how to deploy ad-targeting technologies in a manner that does as much to empower users with better privacy controls as Google has-especially when this could create a new source of funding for “free” content and services and even discounts on broadband? 

I hope instead that the effectiveness of Google’s approach will shift the policy debate about protecting user privacy back to an emphasis on the layered approach Adam Thierer and I have outlined, supplementing consumer education, industry self-regulation, existing state privacy tort laws, and  FTC enforcement of corporate privacy policies with increasingly powerful technological “self-help” tools that allow privacy-wary consumers to take privacy into their own hands.

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