Joel Waldfogel on Privacy and Innovation

Episode Summary

Executive Summary: The episode centers on Joel Waldfogel’s paper arguing that GDPR raised compliance costs in the app market, causing many low-value apps to exit but, more importantly, sharply reducing new app entry. Because successful app outcomes are hard to predict ex ante, this lower entry likely reduced the number of valuable innovations and consumer surplus, while leaving open the possibility that privacy benefits may still outweigh these costs.

Main Topics: GDPR as a cost to app innovation (Priority: 5/5): Waldfogel explains that GDPR raises the cost of participating in app markets through privacy compliance requirements, making entry more expensive for developers. Exit versus entry effects (Priority: 5/5): The discussion distinguishes between the visible exit of many existing low-value apps and the more consequential decline in new app entry after GDPR. Unpredictability and innovation economics (Priority: 5/5): Waldfogel argues that in markets where it is hard to know which products will succeed, reducing entry eliminates many future winners along with many failures. Measuring welfare and consumer surplus (Priority: 4/5): The paper attempts to infer welfare effects by comparing outcomes of app birth cohorts before and after GDPR, focusing on eventual usage and high-usage thresholds. Data collection and empirical design (Priority: 4/5): The conversation covers the painstaking app-store scraping process, delayed observability of app births, and the challenge of finding a true untreated control because GDPR is extraterritorial. Policy debate and privacy trade-offs (Priority: 5/5): Waldfogel emphasizes that the paper identifies a cost of privacy regulation, but does not conclude GDPR is bad; policymakers must weigh that cost against privacy benefits. Related research and platform behavior (Priority: 3/5): The hosts and guest briefly discuss Apple’s privacy measures, the possibility of market concentration effects, and other GDPR studies on tracking and large-firm advantage.

Key Arguments: GDPR increased the cost of app development and compliance, which reduced the number of new apps entering the market. The dramatic exit of apps is less economically important because many exiting apps were already low value and had few users. The central welfare loss comes from reduced experimentation: when entry falls, some apps that would have become successful never appear. Because app success is highly uncertain, a reduction in entry should be expected to lower the number of high-value apps roughly proportionally. Consumer behavior does not clearly show strong demand for privacy-protective products, but that does not rule out non-observed privacy benefits. The paper is intended to identify a cost of GDPR, not to prove GDPR is socially undesirable. Research design was complicated by GDPR’s extraterritorial scope, making it hard to find a truly untreated control group. Evidence from Apple and other platforms suggests the entry decline is not unique to Google Play and is consistent with a broader GDPR effect. Some exits may reflect quality screening or cleanup by app stores rather than direct harm from regulation, which makes the exit spike less concerning than the drop in entry. Other GDPR studies suggest possible side effects such as stronger positions for already large firms and reduced tracking, though those effects may be modest or temporary.

Data Points: App exit after GDPR: around 1,000,000 apps - Waldfogel described an enormous exit of apps from the Android market coinciding with GDPR, but said most were low-value and low-usage. App entry after GDPR: about 50% decline - He said app entry fell by roughly half in the couple of years after GDPR. Consumer surplus impact: roughly one-third decline - He referenced the paper’s long-run estimate that consumer surplus falls by about a third under sustained lower entry. Effect on usage by new cohorts: roughly proportional to the fall in entry - Waldfogel said when entry falls by X percent, usage accounted for by new birth cohorts falls by about X percent as well. Effect on high-success apps: similar percentage decline - He said the number of apps reaching high eventual-usage thresholds also falls by a similar percentage when entry drops. Research horizon: about three years - The team repeatedly collected app data over multiple quarters across roughly three years. Platform coverage: Google Play plus fragmentary Apple data - The main dataset was from Google’s store, with additional evidence from Apple suggesting similar patterns. Control problem: no clearly untreated geography - Because GDPR applies to apps with EU users, the authors could not find a clean untreated control group.

Pivotal Quotes: "the big deal here is the impact, the potential impact on further entry" — Joel Waldfogel: He identifies reduced new app entry as the key economic consequence of GDPR, not the visible app exits. "in a context like that, something that causes an increase in the amount of entry that occurs is going to give us a whole bunch of products, many of which turn out to be not very valuable... but a few that turn out to be really valuable and important" — Joel Waldfogel: He explains why uncertainty makes entry especially valuable for innovation and consumer welfare. "here's a cost of this regulation. And so let's then at least try to be careful about saying we care enough about the possible benefit to bear this cost" — Joel Waldfogel: He frames the paper as identifying a cost that policymakers should weigh against privacy benefits.

Implications: For policymakers, GDPR-like rules may protect privacy but also suppress innovation by discouraging new product entry. For app platforms and regulators, the key challenge is preserving beneficial experimentation while limiting harmful data practices.