Externalities in the Demand for
Privacy: Evidence from the Do-Not-
Call Registry
Khim-Yong Goh, NUS
Kai-Lung Hui, HKUST
I.P.L. Png, NUS

• “Privacy is a fundamental right that people do
care about.”
Pamela Jones Harbour, Commissioner of U.S. FTC
• Existing research has been lagging behind:
– Surveys and laboratory experiments
– Little empirical research about real behavior
– Mostly study direct benefits/costs of privacy, not
externalities between consumers
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• How one person’s decision affect others
– Pollution, public good, etc.
• Two types of externalities among consumers related to privacy
– Preference externalities: How consumers’ product preferences affect others
– Strategic marketing avoidance: How consumers’ marketing avoidance efforts affect others
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• Using real registration data from the U.S. Do
Not Call Registry: -
– Identify the presence of preference externalities vis-à-vis strategic marketing avoidance in the demand for privacy
– Draw implications on optimal government intervention and vendor responses
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• Reasons for preference externalities
– Fixed costs in retailing
 limited products
– Incomplete information on consumer preferences
 product configuration based on aggregate attributes, e.g., age and gender
– These apply equally well to direct marketing
• Within-segment: demand
 when the size of the same segment increases
• Cross-segment: demand
 when the size of other segments increases
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• The larger the size of a demographic segment
 the more likely a person will find the products that she wants via direct marketing
 the less likely that she will sign up for DNC
• H1 (Preference externalities): Marketing avoidance in a particular demographic segment would decrease with the size of that segment
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Theory – Strategic Marketing
Avoidance
• Vendors ignore harms caused by solicitations
• Consumers avoid marketing when the harms exceed the benefits from direct marketing
• Marketing avoidance facilities serve to “filter” the population for vendors
• What would vendors do when the population becomes “richer”?
• How would remaining consumers respond?
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Theory – Strategic Marketing
Avoidance
• In general, larger consumer segments
 stronger impact on vendors’ expected profits due to marketing avoidance
 stronger strategic complementarity
• H2 (Strategic marketing avoidance): Marketing avoidance in a particular demographic segment would increase with the size of that segment
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• Fixed line and mobile, not business numbers
• Telemarketers must check phone numbers against DNC no less frequently than 31 days
• Registrations were indefinite
• Desirable characteristics
– Real observations of consumer choices
– Free service, low sign up cost, and no competition
– Covers entire USA; lots of variations in consumer demographics across regions
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Our equilibrium state
0 10 40 50 20
Week
30
• County- and MSA-level population data from
U.S. Census Bureau
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• There was concomitant increase in consumer purchase of directly marketed items and marketing avoidance
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• DNC registration rates:
-ve
 preference externalities
+ve
 strategic marketing avoidance
• With help of population data, specifically,
• Integrating the above equations,
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SMA among highincome people
PE among lesseducated people
SMA among
Hispanics and non-
Hispanics
SMA among non-
Spanish-only speakers
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Different equilibrium states
Perhaps the effects were due to direct communications?
Maybe consumer heterogeneity mattered?
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• DNC registration rates:
• Estimation equation,
• Within-segment parameters could be identified, but not cross-segment parameters
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Fairly consistent with the MSAlevel results…
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• Strategic marketing avoidance: High income, age, Hispanic ethnicity, non-Spanish-only speaking consumers
• Preference externalities: Less educated consumers
– Waldfogel (2003, RJE) and George and Waldfogel
(2003, JPE): Preference externalities among black, white, and Hispanic ethnicity, but not education in radio and newspaper markets
– Our (telemarketing) results are opposite
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• Evidence of strategic marketing avoidance
 low-value consumers opted out

More profitable “market” for the vendors

Opt out facilities could indeed be helpful to vendors!
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• Direct marketers should support “opt out” facilities because such facilities help refine marketing lists
• Once this is understood, there will be less need for government to offer such services
– Should not “over-respond” to such refinement of marketing lists
• (otherwise “profitable”) Consumers may strategically respond by opting out
• Possible exception on competition law so that direct marketers can agree to limit solicitations?
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• Preference externalities segmented by education
 either:
– Telemarketers have not segmented markets by education fine enough, or
– Product customization is too low in that market
• Perhaps refine offering by education level?
– Financial/investment services, or educational services…
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• Evidence of externalities
 strong justification for government regulation of privacy
– These are beyond “standard” reasons, such as consumer myopia or protecting vulnerable segments, e.g., children
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