Does Competing on Privacy Terms Foster Competition? The Truth of Privacy Exploitation

Based on the proposition that platforms competeon privacy terms and thus prompt privacy-sensitive users to switch to competing platforms with better privacy policies and increase competition, this paper argues that firms compete on privacy terms to prevent consumers from switching by foreclosing competitors, e.g., denial of access to data, while increasing monopoly profits by privacy violation or shifting costs to consumers, which constitutes “privacy exploitation”. Based on the “privacy-as-quality” theory, privacy is a substitute of quality as a measurement of consumer welfare in most antitrust cases, but the reduced privacy could be offset by other positive qualities. Thus, based on case studies and the concepts of the endowment effect and loss aversion from behavioral economics, this paper analyzes the positive effect of “anticipation for privacy” on buyers’ demand to explain how the exploitation can exist on both the producer’s side and the consumer’s side, if we treat the transfer of personal data as a transfer of privacy risk. This papercontributes to the debate on the role of privacy in competition analysis, as well as to the theories of harm literature.