Commentary

How Privacy Regulation Will Chill Commerce

By Solveig Singleton
December 13, 1999
Will privacy become the regulatory boot in the door of the Internet? New ways of collecting information about consumer transactions sometimes worry consumers. But business is changing to offer consumers reassurance about privacy. Top-down regulation is not the answer. New privacy proposals introduced in California threaten to strangle small business and electronic commerce in red tape.

The proposed California privacy rules would require businesses that collect and trade information about their customers to satisfy elaborate notice and consent rules. This radical step would turn the freedom of information on its head. Why should the government stop businesses from learning more about real people and real events in the economy? Human beings should be free to learn about each other, as they always have been. Consumers do not need a law to protect them from people trying to develop and offer goods and services. “Bad guy” behavior like fraud and identity theft is already illegal.

A top-down regulatory approach to privacy threatens electronic commerce. An established shopkeeper on main street can see and speak to his customers. He can get an idea by just looking if they are regulars or newcomers, locals or tourists; he can chat with them and learn why they decided to buy or not to by a tempting item. By contrast, an electronic commerce merchant working from the web is blind and deaf. He is a stranger dealing with strangers over vast distances. Are his customers one-time visitors or are they more loyal? Are they young or old, male or female? If they fill out an order form and abandon it, why? Under these circumstances, its natural for a web site to try to learn more about its visitors.

Regulations that would make it harder for businesses to collect information about markets threaten small business, in particular. Big companies already know who their customers are and can afford expensive lawyers to comply with complicated new rules. Small businesses would be hit harder.

Imagine that the proposed privacy regulation in California becomes the law. You are starting a new business selling pets and pet supplies. Your competitors are big, well-established chains. You have no customers, and no way to find them. You can’t afford television advertising. Your mass mailings have only a 2 percent response rate—the costs are far exceeding the benefits. You want to rent a mailing list from an established company in order to reach only customers who are interested in pets in your area. Then you discover that the only mailing list available is tiny, outdated, and very expensive. Fearing liability, many companies have stopped trading information about pet supply purchases. You decide that you just cannot afford to be in the pet business.

Over the next decades, entrepreneurs will experiment and discover many amazing new things to do with information. Consumers will be able to get up-to-date information tailored to their tastes and preferences. The wasteful practice of sending out thousands of flyers to discover only a bare handful of interested customers will end. Prices will fall. New companies can benefit from what older companies have learned about what consumers really buy to start new businesses and offer new products. This means more choice and lower prices for consumers.

Sometimes companies and their employees will make mistakes. But that doesn’t mean we need top-down regulation. In the age of the Internet, consumers can easily find what company offers the lowest prices and best service. Businesses with the best reputation for giving customers what they want—privacy, low prices, or anything else—will do best. In competitive markets, companies have every reason to respond to a real customer demand for confidentiality. Markets means that problems will be fixed from the bottom-up, in an endless and flexible process of learning and experimentation.

This bottom-up process is the only way to address concerns about privacy without strangling the development of the economy with red tape. It’s one thing for a company to try to respond to their customer’s demands voluntarily. It’s another thing entirely for an army of lawyers to force entire industry to implement a one-size-fits all privacy policy.

California’s proposals to regulate privacy are a losing proposition. There is nothing sinister about the explosion of innovation, wealth and efficiency that libraries of information about customers’ buying habits will allow. It is a natural part of our evolution from face-to-face dealings in small towns to stranger-to-stranger electronic markets. Human beings have never benefited from turning their backs on new sources of information. Let’s not start now.

Solveig Singleton is the director of information studies at the Cato Institute and the coeditor of Regulators’ Revenge.