THE PRIVACY GAME: UNDERSTANDING LOWPRIVACY EQUILIBRIA IN DIGITAL MARKETS

Abstract

When purchasing different products, consumers often implicitly or explicitly agree to various privacy arrangements. These arrangements may pertain to the regulations surrounding the management of information gathered during product purchases and usage. In his paper, Joseph Farrell discusses a “dysfunctional” equilibrium in the privacy dynamics between firms and consumers, emphasising that consumers have resigned themselves to a reality without privacy. He highlights that the Federal Trade Commission (FTC) acknowledged the necessity of steering clear of such an equilibrium in its report. The EU is also undertaking significant initiatives, as evident in the General Data Protection Regulation (GDPR) and Digital Markets Act. This paper demonstrates that the privacy game in question can be modelled as a simplified ultimatum game, revealing that the dysfunctional equilibrium is subgameperfect. While the evolutionary approach employing replicator dynamics suggests the existence of other local attractors relevant to the original ultimatum game, these attractors, contrary to the fairness analysis, prove insignificant in our case. By combining a simplified ultimatum game with evolutionary dynamics, this paper shows how structural and strategic factors stabilise low-privacy outcomes and evaluates how current EU and US regulatory measures interact with these dynamics, highlighting conditions under which privacy-protective strategies could gain traction.