Taxation and privacy protection on Internet platforms

• Published date: 01 February 2018
• Author: Francis Bloch,Gabrielle Demange
• DOI: http://doi.org/10.1111/jpet.12243
• Date: 01 February 2018

Received: 25 March 2016 Accepted: 13 December 2016

DOI: 10.1111/jpet.12243

ARTICLE

Taxation and privacy protection

on Internet platforms

Francis Blo ch1Gabrielle Demange2

1UniversitéParis 1 and Paris School of Economics

2ParisSchool of Economics–EHESS

FrancisBloch, Université Paris 1 and Paris

Schoolof Economics, 106–112 Boulevard

del’Hopital, 75647 Paris CEDEX 13, France

(francis.bloch@univ-paris1.fr).

GabrielleDemange, Paris School of Economics–

EHESS,48 Boulevard Jourdan, 75014 Paris,

France(demange@pse.ens.fr).

Weare grateful to France Strategie for funding

thisresearch within the framework of a Research

Projecton the “Evolution of the Value created

bythe Digital Economy and its Fiscal Conse-

quences.”We have benefited from the comments

ofan anonymous referee and from discussions

withM. Bacache, P. J. Benghozi, M. Bourreau,

B.Caillaud, J. Cremer, S. Gauthier,L. Gille, J.

Hamelin,L. Janin, and J. M. Lozachmeur.

This paper studies data collection by a monopolistic Internet plat-

form. We show that the optimal strategy of the platform is either

to cover the market or to choose the highest data exploitationlevel,

excludingusers with high privacy costs from the platform. For plausi-

ble parametervalues, the platform chooses an excessive level of data

exploitation from the point of view of users. We study how different

tax instruments can be used to reduce the levelof data collection and

analyze the effect of an opting-out option, letting users access the

platform with no data collection. We show that a differentiated tax,

taxing access revenues and data revenues at different rates, is the

most effective instrument and that the introduction of an opting-out

option may harm users as it induces the platform to raise the levelof

data exploitation.

1INTRODUCTION

The precipitous decline in the cost of data collection and storage linked to the development of information technolo-

gies has transformed business models in advertising and commerce. While records on customers and sales histories

have always existed, the digital economy now enables firms to exploit data on a much larger scale, opening up new

opportunities for profit as well as new concerns about privacy and exploitation of personal data. Large sales plat-

forms can now use detailed records of past sales histories to target users and engage in discriminatory dynamic pricing.

Other platforms, like search engines or online social networks, use data on immediate search to auction off advertis-

ing spaces to clients, or sell search histories to intermediaries who accumulate data to better target users with ads.

Business models of all giant Internet platforms rely to different degrees on the collection and exploitation of per-

sonal data. The use of personal data is clearly one of the main specificities of the digital sector in modern industrial

economies.

The development of “big data” and its potential exploitationraise two separate questions. First, data are a valuable

input for Internet platforms, but users voluntarily upload their data without any payment. One can argue that Inter-

net platforms are engaged in a barter agreement, where platforms deliver a valuable service (targeted proposals for

products, targeted ads, outcomes of search, and access to friends) in exchange for the uploading of data. But absent

any price and financial transaction, it is difficult to assess whether this barter is “fair” and if users receive a fair share

of the surplus. The immense profits of (some not all) Internet platforms suggest that this may not be the case and that

Journal of Public Economic Theory.2018;20:52–66. wileyonlinelibrary.com/journal/jpet c

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