"Privacy Regulation and Quality-Enhancing Innovation"

Recent data protection policies, such as the EU GDPR, California CCPA, and Brazilian LGPD, require firms to secure user consent for data collection. The EU Digital Markets Act (DMA) also imposes stringent obligations on "gatekeeping firms." This paper, published in the Journal of Industrial Economics, explores the impact of privacy regulations on innovation in dominant tech firms, analyzing the interplay between user privacy, innovation incentives, and consumer welfare.

In this study, the authors Yassine Lefouili (Toulouse School of Economics), Leonardo Madio (Department of Economics and Management of the University of Padua) and Ying Lei Toh (Federal Reserve Bank of Kansas City), investigate how a privacy regulation, specifically a cap on information disclosure, influences a monopolist's incentives for quality-enhancing innovation and consumer surplus. They find that the impact varies based on the proportion of privacy-concerned users. When this share is small, privacy regulation negatively affects innovation and may harm users. Conversely, if the share of privacy-concerned users is large, privacy regulation positively influences innovation, with no trade-off between privacy and innovation, ensuring users consistently benefit.

Read the full article here