Lecture 5 - Economics

Question 1

What is the definition/ interpretation of economics?

Answer 1

The branch of knowledge concerned with the production, consumption, and transfer of wealth

Question 2

Macroeconomics =

Answer 2

Studies the behaviour of economies and the influence of economic policies on an aggregated level, addressing themes like growth, inflation, and employment.

Question 3

Microeconomics =

Answer 3

Studies the economic behaviour of individuals and companies.

Question 4

What is a central idea of microeconomics?

Answer 4

Central is the idea that the price of products and services is established in a competitive market where demand meet supply.

Question 5

Which are the two important factors that influence the price of a product?

Answer 5

Utility and costs.

Question 6

Utility =

Answer 6

A measure of the usefulness, benefit, or satisfaction that a consumer obtains from a good, a service, or a transaction.

Question 7

What is often used as a measure of utility for a product?

Answer 7

A consumer’s willingness to pay a certain amount of money for a product or service.

Question 8

Cost of a product is largely determined by what?

Answer 8

The cost of a product is largely determined by the price of the resources required to produce it and bring it to the market.

Question 9

Opportunity cost =

Answer 9

Defined as the loss of potential gain from other alternatives when one alternative is chosen.

Question 10

Tangible benefits and costs =

Answer 10

Benefits and costs that can be quantified and can be attributed to an identifiable asset.

Question 11

Intangible benefits and costs = (give some examples too)

Answer 11

Subjective and cannot be measured directly in monetary terms.
E.g.: well-being, safety, reputation, freedom of choice, happiness (individual consumers), customer goodwill, employee morale, corporation reputation (organizations), and societal well-being, resilience, safety, social security, freedom (societies)

Question 12

What does traditional economics assume about the agents in an economic transaction?

Answer 12

Traditional economics assumes that the agents in an economic transaction base their decision on rational considerations of the cost versus the expected utility of that transaction.

Question 13

Homo economicus =

Answer 13

The portrayal of humans as agents who are consistently rational and narrowly self-interested, and who pursue their subjectively defined ends optimally.

Question 14

According to who does the homo economicus not exist?

Answer 14

According to behavioural economists.

Question 15

Bounded rationality =

Answer 15

Used to describe the decision maker’s cognitive limitations of both knowledge and computational capacity.

Question 16

Prospect theory =

Answer 16

Describes the way people make choices between probabilistic alternatives that involve risk, and conclude that the rational agent is a figment of our imagination.

Question 17

Privacy economics =

Answer 17

Studies the economic trade-offs people make when confronted with privacy-related decisions. Such trade-offs are made by individuals, by organizations, and by society at large.

Question 18

Which 3 observations are posed by the economic parameters of privacy?

Answer 18

1. No single theory
2. Positive and negative effects
3. Incomplete information

Question 19

On which two things are the economic parameters of privacy highly dependent?

Answer 19

On context and the actors involved.

Question 20

No single theory =

Answer 20

A single unified economic theory of privacy economics seems unfeasible, given the diversity of contexts in which the issue arises.

Question 21

Why is it nearly impossible for consumers to make informed decisions on privacy?

Answer 21

Because they do not know which data is being collected, for what purposes, and what the consequences might be, in an ecosystem where companies are systematically collecting vast amounts of personal data with substantial economic value.

Question 22

What is the ultimate example of an intangible asset?

Answer 22

Privacy, in its meaning of right and ability of an individual to control the protection and selective disclosure of his or her personal data.

Question 23

Why is an accurate and fair evaluation of personal data and hence privacy (by the principles of economics) impossible?

Answer 23

Due to the absence of an open market.

Question 24

What largely determines the value of a company? And what is this based on?

Answer 24

Investor’s expectations about their future performance. These expectations are based on the expected sales of products and services and the accompanying margins, which, in turn, are based on the perceived value of the data they collect.

Question 25

Mcap =

Answer 25

market capitalization

Question 26

What are the benefits and costs for the individual for protection of their privacy?

Answer 26

Benefits:
- better negotiation
- reduced vulnerability
- improved well-being
Cost:
- Opportunity cost

Question 27

What are the benefits and costs for organizations for protection of privacy?

Answer 27

Benefits:
- Protection of reputation
- Prevention of fines
Costs:
- Opportunity cost
- Cost of control (cost of implementing regulations)

Question 28

What are the benefits and costs for society for protection of privacy?

Answer 28

Benefits:
- Protecting human rights
Costs:
- Opportunity costs
- Cost of surveillance
- Stagnation

Question 29

What does the Chicago School argue?

Answer 29

That privacy reduces the efficiency of the market place by increasing information asymmetry, thus increasing costs and reducing value, and even suggest that the privacy regulation might lead to lower wages, higher unemployment, and higher interest rates.
-> Others have argued against this and said that controlling the dissemination of personal data actually leads to a more efficient market, with positive macroeconomic effects.

Question 30

Which are the 3 waves of economics of privacy?

Answer 30

1. Market efficiency
2. Technological developments
3. Informational privacy

Question 31

Explain the first wave of the economics of privacy?

Answer 31

Market efficiency.
- Considered part of the Chicago School of economic reasoning
- The presumed natural tendency of ecosystems to gravitate to an economic optimum by bargaining
- Privacy regulation will create inefficiencies in the marketplace by creating information inequalities, thus reducing transparency.

Question 32

The Coase Theorem =

Answer 32

Argues that, given sufficiently low transaction costs, institutions evolve to a state of Pareto efficiency.

Question 33

State of Pareto efficiency =

Answer 33

Means that it is impossible for one member of an ecosystem to obtain a better position without worsening the position of another member.

Question 34

Explain the second wave of technological developments?

Answer 34

• Consumers may reap economic benefits by sharing specific personal data, but may experience disadvantages when sharing other personal data.
• Consumers have no clue of the secondary use of their data, who will be using it, when, and for what purpose.
• Laudon (1996) proposes the creation of an information market where individuals may sell the rights to their personal data and receive fair compensation for the use of information about themselves.

Question 35

What would happen in a market where individuals would be free to sell their personal data?

Answer 35

It would spiral to an equilibrium that would benefit a monopolist rather than consumers.

Question 36

When did the dominant school of privacy economics emerge and what does it focus on?

Answer 36

Emerged in the late 1990s. Focuses on the economic value of privacy and the economic consequences of protecting and disclosing personal data from an informational point of view.

Question 37

Price discrimination purposes?

Answer 37

• Can be used as an instrument for many purposes, the most prominent being margin improvement
  E.g. by offering higher prices to customers who can afford it or who have expressed a higher willingness to pay.
• Other objectives can be acquisition or poaching of customers
  E.g. by offering lower prices to new customers
• Or to obtain information on clients
  E.g. by offering discounts in exchange for personal data

Question 38

Data intermediaries =

Answer 38

• Builds up customer profiles and sells targeted advertising space to merchants.
• Such an ecosystem may lead to lower prices, lower search costs, and a better match between supply and demand;
  ->These advantages may be offset, however, by costs of the intermediary itself.
• Data intermediaries can decide to reduce the precision of customer information in order to sell more data and increase revenue
• In ecosystems where merchants place bids on targeted advertisements, higher prices will result

Question 39

Marketing techniques =

Answer 39

• Including unsolicited e-mail (spam) and targeted advertising.
• The more consumers protect themselves from unsolicited mail, the more merchants will spend to reach them, and so on.
• Interestingly, several authors find that targeted advertising may have an adverse effect on consumer spending due to privacy concerns.

Question 40

Subjective utility =

Answer 40

The utility of both privacy and personal data is highly subjective and context dependent.

Question 41

Temporal aspects of utility and costs =

Answer 41

Benefits and costs of privacy decisions may change over time, reversing the economic balance multiple times in their course.

Question 42

Construal level theory =

Answer 42

We know that people clearly see short-term, concrete effects of an action but have difficulty creating a clear mental picture of the long-term, more abstract effects.

Question 43

Irrational agent =

Answer 43

Privacy decisions are never based on a purely rational trade-off of economic benefits and costs.

Question 45

Explain the lack of choice in privacy trade-offs for individuals?

Answer 45

Those who opt out from the digital economy not only face the immediate economic disadvantages, but also less tangible disadvantages, such as social exclusion or reduced opportunities on the labour market.