Managing the Ambient Trust Commons: the Economics of Online Consumer Information Privacy

Managing the Ambient Trust Commons: The Economics of Online Consumer Information Privacy Christopher W. Savage* 22 STAN. TECH. L. REV. 95 (2019) ABSTRACT Privacy interests arise from relationships of trust: people share information with those they trust and conceal things from those they don’t. Trust grows when it is respected and diminishes if it is betrayed. Firms in the online ecosystem need consumers to trust them, so the consumers keep coming online, being surveilled, viewing ads, and buying things. But those same entities make money by exploiting consumer trust—using the information they gain to develop individualized profiles that facilitate advertising that gets people to buy things they may not really want or need, at individualized rather than generally available prices. Trust and, thus, privacy, is therefore best viewed as a common-pool resource for the online ecosystem to manage, not as a commodity exchanged in a market between consumers and sellers. The common-pool resource model explains why online entities have incompre- hensible privacy policies, why they accept regulation by the Federal Trade Commission, and why they recognize the seriousness of data breaches even as they reject any obligation to compensate consumers when a breach occurs. This model also clarifies the nature of the ongoing economic and political conflict between consumers and online entities about per- vasive surveillance and the use of targeted ads. Market-based models, by contrast, do not fit these realities and, as a result, there is no reason to think that “market forces” will opti- mally equilibrate consumer and seller interests. Some modest regulatory correctives are therefore advisable. * George Washington University Law School, Professorial Lecturer in Law; Columbus School of Law (Catholic University), Lecturer in Law; Partner, Davis, Wright Tremaine, LLP. J.D., Harvard Law School (1980); B.A., Harvard College (1977). The views expressed here are the author’s own, and do not necessarily reflect those of any of the institutions with which he is affiliated or any of the clients of his law firm. 95 96 STANFORD TECHNOLOGY LAW REVIEW Vol. 22:1 TABLE OF CONTENTS I. INTRODUCTION ................................................................................................................. 96 II. THE STANDARD MODEL ................................................................................................. 100 A. Information Privacy before the Internet .................................................................. 100 B. The Consumer Internet .............................................................................................. 101 C. The Surveillance Economy ........................................................................................ 102 D. The FTC and Online Privacy ................................................................................... 105 E. The Economics of Privacy under Notice-and-Choice............................................ 106 F. Rejecting the Commodifaction of Privacy ............................................................... 112 III. THE AMBIENT TRUST COMMONS ............................................................................... 114 A. The Idea of a Commons as an Economic Institution ............................................. 114 B. The Idea of Ambient Trust ........................................................................................ 120 C. Creating and Maintaining the Online Ambient Trust Commons ....................... 125 D. Two Distinctive Features of the Ambient Trust Commons ................................... 132 IV. MANAGING THE COMMONS ......................................................................................... 133 A. Avoiding Collapse ........................................................................................................135 1. Targeted Ads I—Lowering Transaction Costs ................................................ 135 2. Avoiding Data Breaches .................................................................................... 137 3. Privacy Policies (and Privacy Theater)............................................................ 139 B. Conflicts in the Commons ......................................................................................... 141 1. The Tragedy of the Ad Commons .................................................................... 144 2. Price Discrimination and the Battle for Consumer Surplus......................... 146 3. Targeted Ads II —Personalized Predictive Profiling ...................................... 150 a. The Trouble with Persuasive Ads............................................................... 151 b. The Trouble with Targeted Persuasive Ads .............................................. 154 C. Improving the Commons ........................................................................................... 158 V. CONCLUSION.................................................................................................................... 162 I. INTRODUCTION Over the last twenty-five years, the internet has transformed our economy, politics, and culture.1 It enables the creation, recording, and analysis of unfathom- able amounts of information about everything we do, both online and offline. When transformative new technologies arise, they quickly permeate the culture and the 1. This article uses the term “internet” as shorthand for the internet itself—the world wide web, Facebook, Google, YouTube, Twitter, eBay—as well as the communications and computing technology that supports it and enables access to it, including smartphones, tablets, laptops, etc. Winter 2019 MANAGING THE AMBIENT TRUST COMMONS 97 economy, creating new conflicts and problems to which existing legal doctrines do not readily apply. The law then plays catch-up to address the issues the new technology creates.2 The law of information privacy is still catching up with the consumer surveillance economy the internet has created. John Maynard Keynes once said, “Economics is the science of thinking in terms of models joined to the art of choosing models which are relevant to the contempo- rary world.”3 The thesis of this article is that much of the legal and policy debate surrounding online consumer privacy has been based on the wrong economic model. The standard approach uses the market as the institutional framework within which to understand privacy policy. The idea is that consumers are (or could be or should be) aware of what information is collected while they are online and what is done with it, and that they do, or can, or should, choose their online activities based on that awareness. This vision of informed, empowered, decisive consumers fits with the “notice-and-choice” model of privacy embodied in the Fair In- formation Practices from the 1970s.4 It also facilitates an economic analysis under which consumer choices supposedly reveal something about the privacy people want, and within which online entities compete by offering greater or lesser privacy protections. The market model provides benefits on two levels. First, it is extremely well- understood. The basic idea traces back at least to Adam Smith, and the familiar im- age of supply and demand curves intersecting at a stable equilibrium level of price and quantity dates to more than 150 years ago, with the modern presentation es- tablished by Alfred Marshall in 1890.5 Standard microeconomics is, so to speak, in the air, and policymakers, businesspeople and consumers alike naturally see the world through its lens.6 Second, when market forces are working well, they pro- 2. See David L. Markell & Robert L. Glicksman, Dynamic Governance in Theory and Appli- cation Part I, 58 ARIZ. L. REV. 563, 575-78 (2016). See also CARLOTA PEREZ, TECHNOLOGICAL REVOLUTIONS AND FINANCIAL CAPITAL: THE DYNAMICS OF BUBBLES AND GOLDEN AGES 23-24 (2002) (revolutionary new technologies generate “changes in the regulatory framework affecting all markets and economic activities”); id. at 114-26, 128-32. 3. Letter from J.M. Keynes to Roy Harrod (July 4, 1938), in THE COLLECTED INTERWAR CORRESPONDENCE OF ROY HARROD (Daniele Besomi ed., 2003), https://perma.cc/L7MV-WXXW (reprinted as Letter 787). 4. See infra Parts II.A and II.D. 5. Thomas M. Humphrey, Marshallian Cross Diagrams and Their Uses before Alfred Marshall, 78 FED. RES. BANK RICHMOND ECON. REV. 3, 3-4 (1992). 6. As Keynes said, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” JOHN MAYNARD KEYNES, 98 STANFORD TECHNOLOGY LAW REVIEW Vol. 22:1 duce more than an equilibrium; they produce an allocation of resources that is op- timal—the desires and needs of consumers are balanced, at least presumptively fairly, against the interests of producers.7 But problems with the market model, both real-world and analytical, are well- known. In addition to high transaction costs, externalities, and information asym- metries, the idea that consumers can make meaningful choices about online privacy is practically a poster child for the behavioral economic critique of standard microeconomics. People aren’t good at bargaining over complex, contingent, or uncertain future costs and benefits of the sort arising from online surveillance; no such bargaining occurs in fact; and it’s not clear why rights in information arising from in- teractions between an individual and an online entity belong to the individual (to be bargained

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