Home PublicationsCommentary When It Comes to Regulating Data, the FTC Has an Economics Problem

When It Comes to Regulating Data, the FTC Has an Economics Problem

by Joshua New
Federal Trade Commission building

The U.S. Federal Trade Commission (FTC) needs to start taking economics seriously, according to former Commissioner Joshua Wright. Specifically, the FTC is neglecting to do its due diligence when it comes to heeding cost-benefit analysis of new business models enabled by big data. In a recent speech at George Mason University, where Wright now serves as director of the university’s Global Antitrust Institute, he argued that the FTC has a bad habit of “presuming materiality” when it comes to potential harms of big data—that is, the regulatory agency assumes that consumers are significantly harmed by business practices that might infringe upon their privacy, even when cost-benefit analysis reveals that the benefits to consumer welfare outweigh any such harms. Should the FTC continue with this approach, concludes Wright, the ability for businesses to tap the potential of data to benefit consumers would be greatly reduced.

The reason the FTC has adopted this mindset, Wright posits, is because the Bureau of Consumer Protection, which investigates and brings suit against companies for unfair, fraudulent, or deceptive business practices, “simply does not require significant economic analysis” for much of the work it performs. For cases where business conduct necessarily harms consumers, such as fraud, this approach is perfectly adequate as it does not take a team of economists to reveal wrongdoing. But for cases where the business conduct does not present obvious material harm, a deeper level of economic analysis becomes necessary. The FTC itself has acknowledged as much in its 1980 Policy Statement on Unfairness, which states the agency would not pursue enforcement action against unfair business practices if the benefits of the practice—to consumers or to competition—outweigh its harms. Thus for the FTC to reprimand a company, there is an obvious need for a cost-benefit analysis of the practice in question.

However, with the rise of big data and the Internet of Things, the new kinds of business models these technologies enable have muddied the straightforwardness of this approach. Rather than pursue robust economic analysis to carefully evaluate the costs and benefits of these new business models, the FTC has demonstrated apprehension about data collection and use as a whole, regardless of whether or not the practice in question involves sensitive data or even poses real harms to consumers. As a result, says Wright, regulators are failing in their responsibility to adequately assess the benefits of these new business practices, and instead weigh risks too heavily in their analysis.

The FTC’s charges against Nomi Technologies, which the company settled in April 2015, aptly demonstrate the problems of the FTC’s unbalanced approach. Nomi develops technology that allows retailers to anonymously track consumers as they enter and move around their stores, and in its privacy policy stated that consumers could opt-out of this data collection both online and in stores that used Nomi’s technology. In 2012, the FTC filed suit against Nomi on the grounds that the company had failed to ensure that all of the stores using its technology allowed consumers to opt-out in person. The FTC claimed that Nomi misled consumers by failing to provide an in-person opt-out mechanism and failing to notify consumers that stores using their service were collecting anonymous data about them. However the FTC’s complaint against Nomi does not provide any evidence that consumers were harmed by this data collection. In fact, the complaint does not even claim consumers were harmed at all—just misled. And missing from the FTC’s claim was any acknowledgement or analysis of how Nomi’s data collection technology might enhance consumer welfare, such as by helping retailers improve their store layouts, enhance shopping experiences, better manage staffing based on customer traffic, and so on.

Criticism of the FTC’s approach is not simply an argument for pragmatism to trump genuine concerns about consumer welfare. Rather, concludes Wright, the FTC’s willingness to punish companies for immaterial harms actually discourages them from adopting voluntary practices that enhance consumer choice and transparency. For example, Nomi had no obligation to provide an in-store opt-out feature for consumers, yet states its intent to do so in its privacy policy. Now, rather than companies taking extra care to adhere to their privacy policies to the letter, the more likely outcome is that companies will simply stop providing such options for consumers out of fear of regulatory sanctions substantiated by immaterial concerns of consumer harm.

To encourage the FTC to better use cost-benefit analysis in its decision-making, Wright suggests several simple but important changes. First, the Bureau of Economics, which provides economic analysis for the FTC, should serve the entire Commission, rather than just the Bureau of Consumer Protection. The Bureau of Economics typically acts as a supporting office for the Bureau of Consumer Protection, when in reality its efforts should sometimes conflict—the economic merits and the risks to consumers of a particular business practice are fundamentally different qualities, and should be analyzed as such. By treating the Bureau of Economics as subservient to, or less relevant than, the Bureau of Consumer Protection, the FTC misunderstands the fundamental role of economics in privacy regulation and limits the amount of information available to Commissioners. Second, the FTC should strive to establish an economically coherent regulatory framework for privacy. The Commission is at its best when its rulemaking is informed by robust and rigorous research and analysis. However, some of the FTC’s reports fail to meet high standards for analytical rigor and thus the Commission should exercise better discretion when publishing and using these reports to guide its actions. Finally, the FTC should direct the Bureau of Economics to make public all of its analysis for consent decrees—the type of settlement action that resolves the majority of the Commission’s work on privacy issues. The FTC already must publish explanations of each agreement, but few of these consent decrees sufficiently describe the economic analysis used, if it was used at all, to inform the Commission’s decisionmaking. By publishing the economic rationale for the FTC’s actions regarding privacy regulation, regardless of whether or not the Bureau of Economics supports or rejects the Commission’s ultimate action, the increased transparency in the Commission’s decisionmaking process would encourage the FTC’s to weigh economic analysis more appropriately in its decisionmaking.

If the FTC gets its economic approach right, Wright expressed confidence that the agency could be a powerful intellectual leader in encouraging robust privacy regulations that protect consumers without sacrificing the benefits big data can offer.

Image: Carol M. Highsmith

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