Online Privacy and Antitrust

The policy debate over the role of online privacy in antitrust enforcement has been going on for years. Under the new administration, the profile of online privacy issues is likely to increase. Much of the policy debate concerns consumer preferences for privacy and whether privacy can be considered another measure of quality. While quality itself might be difficult to measure, competitive effects on quality, or more specifically privacy, in merger reviews can be quantified through calculations similar to upward pricing pressure (“UPP”) analyses.

Some proponents for an aggressive enforcement stance on privacy in merger reviews argue that consumers pay for monetarily free online services with their data, and thus, any decrease in privacy (or increased use of their data) could be viewed as a price increase of sorts. However, those on the other side of the debate argue that consumers are not uniform in preferring more privacy to less and that consumer data allow online services to offer consumers better and more targeted offerings.

While not necessarily settled, there is a growing consensus that consumer privacy is a characteristic of the quality of online service. However, difficulty in measuring changes in quality (and privacy) remains an important perceived issue for antitrust enforcement. One possible approach to overcoming this issue of measurement involves applying a strategy similar to that applied in UPP analyses.

Consider a merger between two competitors that offer online services to consumers for free. In this example, companies attract consumers away from competitors by offering higher quality service. Thus, the merger will tend to reduce the incentive of the merging firms to incur the cost of offering higher quality. Just as in price-based UPP analyses, it is possible to quantify the incentive to reduce quality from a merger by measuring the size of the incremental efficiency cost necessary to eliminate the incentive to reduce quality. This approach does not require that quality itself be measured. Instead, the inputs for this approach are the same as those used in a price-based UPP calculation, diversion ratios and pre-merger margins. However, the diversion ratio that matters is that induced by a change in quality rather than price, and it likely can be measured similarly to diversion ratios using price – with market shares, switching data, or natural experiments.

Therefore, even if a product is offered to consumers for free, reductions in com- petition can harm consumers. These harms can be measured with UPP-type analyses, even when the effects take the form of a reduction in quality or privacy.

EI Principal Keith Waehrer has analyzed merger and monopolization claims across numerous industries. This article is based on his paper titled “Online services and the analysis of competitive merger effects in privacy protections and other quality dimensions.”