Distributional Consequences of Privacy Regulation on Platforms

Abstract

What are the welfare consequences of privacy regulation when a media platform offers both an ad-supported free version and an ad-free premium subscription? We present a model where privacy regulation lowers advertiser willingness to pay for advertising. The platform reacts by lowering the premium subscription price while increasing the advertising load imposed on free viewers. Low-income consumers— who consume the ad-supported version because they are more price sensitive and less advertising-averse—are harmed by the privacy regulation while high-income consumers are better off. When we consider consumer taste for privacy, we find that it is possible for the lowest income consumers’ to benefit from privacy because of their low ad aversion, meaning that the regulation can benefit the very bottom of the income spectrum in addition to high-income consumers, while the lower-middle class is hurt. In extensions we consider cases where wealthier consumers are more valuable to advertisers and when the platform offers intermediate options with a lower price and less advertising and provide conditions under which our main qualitative results still hold

Keywords

JEL codes