Imagine the personal data you've left scattered across the internet over the past 10 years: search histories, product purchases, location coordinates, and every upvote you’ve made while going down 2 a.m. rabbit holes on Reddit.
This data, unseen but omnipresent, powers an entire economy. The purchases, public passions, and private preferences that make up your consumer persona are more than just whispers in the digital wind. They’re valuable commodities, eagerly snapped up by companies seeking to understand behavioral patterns, online interactions, and buying habits.
The economic value of these data sets has largely been an enigma — until recently. Jacopo Perego, the Class of 1967 Associate Professor in the Economics Division at Columbia Business School, has co-authored a series of novel research papers on how consumer data should be valued, how it influences user welfare and platform profitability, and the potential implications of policies designed to protect consumers’ privacy.
Professor Perego believes these dynamics will only continue to escalate in importance as data underpin more and more of our everyday lives. We spoke with him about this emerging field of study — and why protecting consumer privacy isn’t as clear-cut as one might think.
CBS: Why is this such an important field of research?
Jacopo Perego: Well, personal data has really become an indispensable input into the modern economy. Think of your favorite e-commerce platform or those strangely accurate ads on your social media feed. That's your data hard at work.
Our data fuels industries that together are worth trillions of dollars. Now, given its significance, you'd assume we would thoroughly understand how data markets work: Are they efficient? Should they be regulated? And if so, how? It turns out, we know surprisingly little about these questions, or at least not as much as we should. So it’s only natural that these days you have a lot of folks — academics, policymakers, and even companies — thinking about these questions.
CBS: What do we actually know about these markets?
Perego: Let me frame it in this way. You are the primary source of data about yourself. In principle, it’s reasonable that you should have some control over your data, when it is collected, and how it is used. And perhaps, you should even receive an appropriate compensation for it. This is how a typical input market would work. But that’s not how data markets work, at least not today.
In the best-case scenario, you have very little control over how your data is collected and used, and you are imperfectly compensated through old-fashioned mechanisms like barter. Companies like Google and Facebook give you a service in exchange for your data. These services are incredibly valuable to consumers, but as an economist, we don’t typically regard barter as the most efficient way to organize a market.
CBS: That’s the best-case scenario?
Perego: Yes. The worst-case scenario is when you don’t even know your data is being collected and sold to third parties, forget about being compensated. This is what happens in modern data-brokerage markets. Companies like Acxiom, for example, scrape data about you from various sources, package it, and sell it to marketers. In most cases, consumers are unaware that’s happening. Again, in principle, there is nothing wrong with this practice, but it’s probably not the most efficient way of designing a data market. Companies may not be getting the high-quality data they need. And consumers may be supplying too much or too little of this data.
CBS: Can you share some of the top takeaways from the papers you’ve published on this topic?
Perego: There is a lively discussion right now about how we could improve things and redesign these markets to promote efficiency, benefiting consumers and society as a whole. I’ve recently worked on three papers that contribute to this discussion.
The first paper, “The Value of Data Records,” asks a foundational question: What is the value of your personal data from the viewpoint of a company that wants to use it? A key finding was that the value of your data depends not just on you, but also on the data of other consumers in the database. This means that if another consumer were to sell her data to a company, the company’s willingness to pay for your data would change. In economics, we call this an externality. We found that this externality is especially prominent in platform markets like Google and Facebook, due to the particular ways platforms tend to pool data of different consumers together.
Now, sometimes markets can have troubles pricing an externality, and this is bad news for their efficiency. In a follow-up paper, “Competitive Markets for Personal Data,” we ask whether the externality I just mentioned is bad enough to lead an otherwise competitive market to fail — that is, to become inefficient. We found that this externality can lead a competitive data market to trade an inefficiently low or high quantity of data. We also look into potential regulatory solutions, like the design of a data union. In this model, consumers would voluntarily relinquish their data to the union, which would manage it on their behalf. The data union could sell part of it to third parties — and they would return all the proceeds to the consumers, as a data dividend.
In another paper, “Privacy and the Value of Data,” we studied how other regulatory interventions — specifically, the introduction of privacy protection laws — affect the value of consumers’ data and people’s welfare. We found the effects of these interventions can be very complex, requiring careful design to avoid unintended consequences.
CBS: What subsequent areas of study do you hope to tackle?
Perego: There is much more work to be done to better understand these markets, how to design them optimally, and correct their inefficiencies. For example, proposals like the idea of data intermediaries and data unions are on the table. We still don't know which of these proposals are the most promising or how to implement them in practice.
CBS: From the consumer perspective, do you think people really care about protecting their data?
Perego: It’s a complex issue. If you look at survey data, you would conclude that people overwhelmingly care about their privacy. However, incentivized experiments present a more nuanced picture. My guess is that, as people become more aware of how their data is used or misused, they’ll value their data privacy more. But this question is incredibly important, and it would be great to gather more evidence from large-scale incentivized experiments.
CBS: What are a few ways this research is applicable to business school students?
Perego: The first thing to keep in mind is that things are in flux right now from a legislative perspective. This creates uncertainty and some opportunities. Unlike in Europe, the United States does not have a federal law that organizes how consumer data privacy is protected. A dozen states have passed local laws, which have some differences. More states will follow in the next couple of years. From a business perspective, this patchwork of legal requirements creates uncertainty and increases the cost of compliance. Some companies are adapting. You’ve got companies creating new roles such as chief privacy officers, who are in charge of managing all the data privacy aspects of their company. We’re just at the beginning of this discussion, and there will be more and more changes to come.
There are also potential opportunities for new business models. The answer to your last question — do consumers care? — is central here. If consumers demand more data privacy, which companies are best positioned to meet this demand? Will it be the incumbents, who built their business models around the exploitation of consumers’ data? Or will it be new players who employ entirely different business models? That will be fascinating to watch and study as it unfolds.
Watch experts at CBS discuss consumer privacy in the media: