Identity and Choice

Identity and Choice:
The Implications of Market Power for the Technologies of Privacy

Phil Agre

April 1999

Paper presented at CFP'99.

Draft -- references to follow.

You are welcome to forward this article electronically to anyone for
any noncommercial purpose.

2200 words.

The success of the Internet has provided a simple and ubiquitous
platform for the construction of a vast range of technologically
mediated relationships.  Interactions between individuals and
organizations that had formerly been constrained by the practicalities
of paper mail, office visits, and the telephone can now be structured
in new ways through electronic mail, the World Wide Web, and an
emerging generation of information appliances.  Internet-based media
afford considerable opportunities, but they also pose considerable
risks.  Perhaps the most significant of these risks is the threat that
inappropriate application of new digital media can pose to personal
privacy.  As technology makes it possible for organizations to
capture ever greater amounts of information about the individuals with
whom they transact business, an awareness has grown of the need for
clear rules, and in particular of the ways in which the technologies
themselves both articulate and enforce such rules.  It follows that
the ways that personal information end up getting handled will be
determined through the interaction of three seemingly quite different
realms: technology, markets, and law.  How do these interactions work,
and how can we draw on our understanding of them to design the optimal
combination of technological architectures, market mechanisms, and
legal rules to protect personal privacy?

Two stories are circulating in response to this question.  The first
story imagines technologies of choice.  On this story, organizations
will use the new digital media to offer individuals a menu of privacy
options that they can take or leave, individuals will decide for
themselves which options they like best, and competition will ensure
that the options offered bear a rational relationship to the benefits
to be obtained by choosing them.

The second story imagines technologies of identity.  On this story,
the focus of concern is personal identification.  Information that is
not personally identifiable is vastly less sensitive than information
that is, and technologies both old and new provide a wide and
complex range of architectural options form the traditional methods
of complete identifiability to the opposite extreme of complete
anonymity.  Designers will choose the option that provides the parties
to a transaction with all of the functionality and guarantees they
need while minimizing the degree of identifiability of any information
that pertains to individuals.

It will be noted that the technologies invoked in these two stories
are compatible with one another, even if the design strategies that
the stories prescribe are not.  The gap arises because underlying
these stories are quite different pictures of the place of personal
information in the market.  Let us, therefore, consider the two
stories separately, beginning with the technologies of choice.

The argument for technologies of choice rests on a certain argument
from neoclassical economics.  In a perfect neoclassical market,
rights to the use of personal information will be commodities like any
others, freely bought and sold, either singly of in bundles with other
commodities.  Businesses buy these information rights from consumers
if they can profit by doing so, for example by providing the consumers
with customized products, and consumers will sell these rights if the
benefits they obtain by doing so exceed the costs.  This picture is
intuitively compelling, but everybody agrees that it does not conform
to reality.  First of all, perfect neoclassical markets presuppose
that businesses and consumers already have all of the information
about one another that they need, thus making the whole issue moot.
And secondly, the transaction costs of this trade in information
rights are numerous and considerable.  Consumers must expend the
effort to comprehend their options, and predict what consequences
each option would have.  This prediction is especially difficult
because the consequences arise through the workings of numerous
institutions that are likely to be distant from the consumer's
experience.  Organizations must expend the effort to explain the
options and capture the consumers' choices.  And then individuals must
monitor whether organizations stick to their promises, and take legal
or other action to enforce their agreements if not.

Proponents of technologies of choice do not claim to eliminate these
transaction costs, but they do claim to reduce them to such an extent
that individualized negotiation can replace uniform rules.  Let us
accept for the sake of argument that the economic analysis behind
this claim is accurate and adequate, so that moral and political
considerations, for example, do not greatly change the overall
picture.  When is the claim true?

To evaluate the choice proponents' claim, let us begin by observing
-- as they have themselves -- the conceptual convergence between
their own proposals and the European Union's Data Protection Directive.
This convergence would seem odd, given that the EU Directive is often
held up as the opposite of the market-driven approach.  In particular,
it would seem odd because the Directive, having originated with a
concern over databases maintained by a centralized welfare state,
is explicitly framed in terms of a set of political rights: rights
of notification, correction, and so on.  But the Directive can also
be interpreted in the market context as a conventional regulatory
strategy to correct a market failure, providing consumers with
necessary information about market offerings when the market does
not produce enough such information by itself.  In this light,
technologies of choice might be viewed as providing the technological
conditions for market institutions to self-correct, so that regulatory
intervention is no longer needed.  Is this view accurate?  One item
of evidence against it is the fact that industry is developing and
adopting these technologies under insistent threats of regulatory

Whatever the case, the underlying continuity between the regulatory
and technical approaches suggests a spectrum of ways in which the
two approaches might be complementary.  The technologies might be
viewed as a means of implementing the regulations, or regulation may
be necessary to compel stragglers to adopt the technology.  Whatever
the right answer, the great virtue of this whole family of approaches
to privacy protection is conceptual uniformity: whatever its
problems, the EU Directive (unlike current US policy) applies a common
conceptual framework to the full range of privacy issues.  This allows
citizens to economize on intellectual effort: having comprehended
the system in one domain, they can apply their understanding in
other domains.  It also facilitates institutional learning: experience
implementing the policy in one domain is likely to be transferrable
to other domains.  The adoption of technologies of choice may have
the same virtues, inasmuch as they propose a standardized architectural
platform that is equally applicable in a wide range of domains.

That said, the hopeful story about reducing transaction costs in the
exchange of information rights threatens to mask a deeper assumption.
Personal information is typically exchanged in the context of a
transaction concerning some underlying product or service, and the
question remains whether the market in that product or service works
correctly.  A vendor with market power can extract money rents, of
course, but also informational rents.  To the extent that technologies
of choice make it easier to capture personal information, in the
context of market power they threaten to lower the barriers to the
capture of information rents.  Because this is quite the opposite of
their stated purpose, the question of market power should loom large
in any evaluation of the choice proponents' claims.

What is market power?  Although the term "power" suggests a political
concept, market power is an economic phenomenon that is found to the
extent that a single buyer or seller in a market has the unilateral
capacity to affect the prices or terms under which exchanges in that
market take place.  Obvious examples include monopoly and monopsony,
but market power is likely to be present in any oligopoly whose
members focus their attention on somewhat different, if overlapping,
parts of the market.  Industry concentration should at least raise
the question as to whether the largest firms have power to affect
the market.  Although industry structure can be affected by many
variables, a particularly salient variable in the present context is
information technology.  Although the Internet has raised hopes for
a return to Adam Smith's vision of large numbers of small businesses
meeting through an impersonal price system, in fact the Internet
very plausibly contributes to industry consolidation by amplifying
the vast economies of scale that are inherent in information work.
The Internet is surely not the sole cause of the current spectacular
wave of mergers, but economic theory would urge attention to the

When and where these concerns are valid, and to the extent that they
are valid, technologies of choice risk becoming the opposite of what
their proponents claim for them: not levellers of the playing field
but incliners of it.  This is a serious matter.  What is more, to the
extent that the proponents of technologies of choice are themselves
part of or allied with firms in the computer industry whose control
of de facto standards provides them with the leverage to shape the
development of further standards, existing market power threatens
to amplify market power in a systematic way throughout the economy,
and to do so while flying the flag of market efficiency and voluntary
local choice.

These considerations throw light on a longstanding concern about
the EU's Data Protection Directive, that while placing a robust
conceptual grid around the practices of capturing and using personal
information, it is essentially powerless to stop the proliferation
of new technologies and practices of data collection.  This concern
brings to the surface a conflict of assumptions at the heart of
privacy policy.  To the extent that one regards present-day democratic
political systems as functioning correctly, privacy policies to
restrain new technologies of data collection should not be necessary,
since the political system will accurately express the collective
will in relation to each next technology that is proposed.  Likewise,
to the extent that one regards the market as functioning according
to the idealizations of neoclassical economics, the market in rights
to personal information should operate to determine which technologies
of data collection provide a net social benefit and which do not.
In each case, the conceptual framework of both the EU Directive and
the technologies of choice should suffice.  But if those things are not
true, then something more or different may be required.

These considerations should encourage us to return our attention to
the other main category of technologies of privacy protection, namely
technologies of identity.  Whereas technologies of choice presuppose
and facilitate an idealized market whose participants have no power
to influence the terms of exchange beyond the allocations determined
by market efficiency, technologies of identity make no such
presumption.  Where technologies of choice create a commodity --
personal information -- and enable bargaining over it, technologies
of identity prevent that commodity from existing in the first place.
As such they promise to deliver many of the benefits of new digital
media without lending themselves to the extraction of informational
rents.  Of course, it is conceivable that technologies of identity
would be created in a perfectly functioning market, simply as a way
of implementing the assignment of information rights that is dictated
by a particular (and enduring) market equilibrium.  But the special
interest of technologies of identity lies in their potential for
solving some of the problems posed by an imperfect market.  The most
obvious means of adopting such technologies is through the democratic
political process, as the parties who suffer from the distortions
of market power organize to redress those distortions and restore
something more closely resembling a fair bargaining situation.
But technologies of identity might also be adopted voluntarily,
for example to economize on the potentially considerable costs
of monitoring an organization's contractual commitments not to
abuse personal information.  If this scenario seems far-fetched,
consider the situation of a business that contemplates a shift
from paper-and-cash-based transactions to computerized ones; consumer
resistance to computerized information capture, on the assumption that
the captured information will be abused, may cause the business to
refuse or postpone the shift.

The foregoing analysis, then, offers potential criteria for
determining which technologies of privacy are appropriate or
inappropriate in a given situation.  Because market power is rarely
an all-or-nothing matter, of course, most real situations will
be found somewhere in the middle of the spectrum I have sketched.
Further progress thus depends on an analysis of this spectrum,
and indeed of several spectra, not least that between identification
and anonymity, and between the technologies of identity and choice.
It will be important to understand the full range of ways in which
real markets -- both the market in information rights and the markets
in the various underlying commodities -- do and do not correspond to
the neoclassical ideal, and what consequences these market structures
hold for the gains to informational trade and the depredations of
informational rents.

It is common to frame these matters in terms of a metaphorical
contrast between "top-down" and "bottom-up" approaches to protecting
privacy.  I think that this is exactly right.  We should resist the
top-down regime by which an oligopolist extracts informational rents
in an unfair bargaining situation, or by which a software monopolist
imposes potentially unfair rules on large sections of the market.
Instead, we should strengthen the bottom-up practices of democracy
whereby societal values about information exchange and collective
resistance to dysfunctional market power are given expression in rules
that create a level playing field for all.

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