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Taxation and Privacy Protection on Internet Platforms

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Francis Bloch and Gabrielle Demange

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The precipitous decline in the cost of data collection and storage linked to the development of information technologies has transformed business models in advertising and commerce. Large sales platforms can now use detailed records of past sales histories to target users and engage in discriminatory dynamic pricing. At the same time, other platforms, like search engines or online social networks, use data on immediate search to auction off advertising spaces to clients , or sell search histories to intermediaries who accumulate data to better target users with ads. Most often, Internet platforms are engaged in a kind of barter agreement with the users. They deliver a valuable service (1) in exchange for the uploading of data. The exploitation of data however necessarily involves a privacy loss.

In this theoretical paper, Francis Bloch and Gabrielle Demange study how regulatory instruments, and in particular various forms of taxation, can be used to improve this opaque barter agreement.
The authors construct a model where a monopolistic platform chooses (and commits to) a degree of data exploitation balancing two effects. On the one hand, an increase in data collection increases revenues by increasing the value of the user to advertisers or for targeted pricing. On the other hand, an increase in data collection may deter users with high privacy cost to access the platform. In this model, they compare the optimal level of data exploitation chosen by the platform and the users and show that the platform’s choice is likely to be excessive.
The authors study how different forms of taxation affect data collection. They first observe that a tax on profits does not affect the choice of the platform. A tax paid by the platform per user does not affect the marginal benefit of data exploitation, but reduces the profit made on the marginal user accessing the platform, thereby reducing the cost of data collection. Hence, a tax per user (or per flow of data as users do not choose the level of data they upload), results in an increase in data exploitation. A specific tax paid by users (like a tax on internet service providers) results in a reduction in the welfare of users. The only tax which allows to correct for excessive data collection is a tax on revenues which treats differentially platform’s revenues accruing from one-time use (like auction revenues based on current keywords) and revenues linked to data collection (like resale of data to intermediaries). If fiscal authorities charge a higher tax level on resale of data than on auction revenues, taxes deter the platform from exploiting the data, playing the classical role of a Pigovian tax correcting for externalities . In this paper, Francis Bloch and Gabrielle Demange also explore the effect of the introduction of an option for the users to access the platform with no data collection. This allows the platform to collect access revenue from those users who choose to opt-out, segmenting the market into two groups. This changes the level of data collection chosen by the platform, resulting in a decrease in the maximal level of data exploitation for which the market is covered, but in an increase in the region of parameters for which the platform chooses the maximal degree of data exploitation. The platform’s profit decreases with the introduction of the opt-out option, as this creates competition with the regular service with data collection and hence reduces the platform’s ability to generate data revenues. More surprisingly, the authors show that users may also be harmed, because the introduction of the opt-out option may lead the platform to switch from a régime of market coverage to the maximal level of data exploitation, hurting users with low privacy costs who choose to access the platform with data collection.

(1) targeted proposals for products, targeted ads, answers to keywords search, access to friends

Original title: “Taxation and Privacy Protection on Internet Platforms”
Forthcoming, Journal of Public Economic Theory, special issue on Taxation and Regulation in the Digital Economy
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