Data Privacy Is for the Privileged

A nondrinker is more likely to hear about a nonalcoholic beer brand and a Black woman about travel-size cosmetics that match her skin tone through targeted online ads rather than the ones offered through the old “flood the zone” approach of big brands and mass marketing. The change has created a more responsive and inclusive marketplace, much as individualized credit scoring has increased the number of people who are able to secure loans.

Yale research demonstrates that targetability of prices can also create social value by increasing the accessibility of valuable products and services to lower-willingness-to-pay customers. Indeed, a study from Chicago Booth finds that data-based personalized pricing by a large human resources platform led to lower prices charged to small-business customers than under a uniform pricing policy.

Sparse data and fragile algorithms

Could the regulators be missing a bigger issue? MIT research has argued that the real problem is not that companies gather too much data; rather, it’s that they don’t know enough about marginalized individuals to make it viable to advertise to them. If companies can’t predict if certain consumers or consumer groups will be profitable to serve, they exclude these potential customers from campaigns.

The algorithms that govern so much of what we see online are shockingly fragile in the face of sparse or fragmented customer data. If you are rich, companies know a lot more about you than if you are poor. Research out of Boston University demonstrates that the people who value privacy the most are richer, older, and more educated. Privacy is arguably a problem of the privileged consumer.

In the meantime, poorer consumers who may be excellent prospects will be excluded, in a sense, from the digital economy if companies cannot predict how they will respond to ads. The ads they see won’t be personalized so will have less value to them. Indeed, a study from Northeastern University, presented to the Federal Trade Commission, examined the accuracy of Experian’s marketing database, which companies can tap when deciding whom to target in their marketing efforts. Compared with white consumers, Hispanic and Asian consumers are far more likely to have incorrect or missing data—and thus more likely to be overlooked by companies. Follow-up work out of the University of Melbourne finds similar results in an analysis that included 10 data brokers.

The debate needs to pivot from minimizing the quantity of customer data to ensuring digital equity. Research from London Business School finds that Meta’s bidding algorithms placing ads for jobs in STEM fields were more likely to show them to men than to women. Policymakers encourage companies to minimize the collection of personal data about sensitive characteristics such as age, gender, race, and sexual orientation. But if companies don’t know who is male or female, white or Hispanic, how can they test for and prevent algorithmic bias against those groups? Further, how can they avoid unfair treatment of marginalized groups in “data deserts”?

Data help small companies compete

Now consider how these same regulations affect the ability of small companies to compete against the big guys. Nine in 10 small businesses use online advertising, predominantly purchased from Facebook. Small entrepreneurs rely on personalized pricing and communication to take on established giants, as demonstrated in Tilburg University research, conducted using data housed at Booth’s Kilts Center for Marketing, on the emergence of craft beer upstarts displacing the behemoths who had dominated the beer industry for a century. Those upstarts grew from 3 percent of US beer sales to 20 percent between 2005 and 2020. A similar trend has been repeated a thousand times over for niche brands in categories ranging from multicultural beauty care to sustainable packaged goods. Having easy access to data about what consumers want can level the playing field between small and large businesses.

Data restrictions also put small businesses at a disadvantage by increasing their costs. Research from Northwestern University finds that data-privacy initiatives such as Google’s purported phasing out of cookies and Apple’s “ask-app-not-to-track” option in its App Tracking Transparency initiative disproportionately increase the cost of acquiring new customers via targeted advertising for small advertisers.

Similarly, other research from Northwestern suggests a link between data privacy and product returns. One part of the study looked at how the absence of Chrome and Safari data-tracking restrictions affected Wayfair, a large online retailer—finding that consumers received fully personalized recommendations, increased repeat purchases, and made 10 percent fewer returns. Returns and restocking costs can be particularly burdensome for small, niche merchants.

Data-privacy-compliance costs also put small companies at a competitive disadvantage. Research from Boston University finds that the General Data Protection Regulation in the European Union caused total EU usage of digital advertising vendors to decline 24 percent. But the digital advertising sector became more concentrated, with dominant advertising platforms such as Google gaining market share.

The tech industry proposes solving the problem by collecting more data about their own customers’ behavior on their own websites and by using privacy-enhancing technologies to keep data anonymous. But again, this favors Big Tech companies that already have more data from their websites and that can more readily implement state of the art “privacy-enhancing technology.”

As we write this, 13 states in the US have passed comprehensive privacy laws modeled on the GDPR. But where are the studies showing the tangible benefits of these changes to consumers and society? We need to tap the brakes on current corporate and government initiatives and should demand evidence for how these proposals safeguard the interests of diverse consumers and do not undercut the interests of poorer consumers. Otherwise, we will tilt the business battlefield to favor Goliath over David.

Jean-Pierre Dubé is the James M. Kilts Distinguished Service Professor and a Charles E. Merrill Faculty Scholar at Chicago Booth. John G. Lynch Jr. is a distinguished professor at the University of Colorado and executive director of the Marketing Science Institute.