Abstract. Unsolicited solicitations in the form of telemarketing calls, email spam and junk mail impose in aggregate a substantial negative externality on society. Telemarketers don’t bear the full costs of their marketing because they do not compensate recipients for the hassle of, say, being interrupted during dinner. Current regulatory responses that give consumers the all-or-nothing option of registering on the internet to block all unsolicited telemarketing calls are needlessly both over- and under-inclusive. A better solution is to allow individual consumers to choose the price per minute they would like to receive as compensation for listening to telemarketing calls. Such a “name your own price” mechanism could be easily implemented by crediting consumers’ phone bills (a method analogous to the current debits to bill from 1-900 calls).
Under this rule, consumers are presumptively made better off by a regime that gives them greater freedom. Telemarketing firms facing higher costs of communication are likely to better screen potential contacts to find consumers who are more likely to be interested in their solicitation. Consumers having the option of choosing an intermediate price will receive fewer calls, which will be more tailored to their interests and will be compensated for those calls they do receive.
But giving consumers the right to be compensated may also benefit some telemarketers. Once consumers are voluntarily opting to receive telemarketing calls (in return for tailored compensation), it becomes possible to deregulate the telemarketers – lifting current restrictions on the time (no night time calls) and manner (no recorded calls). For example, if the prohibition against tape-recorded messages were repealed, we could imagine local grocery stores or movie theaters using the telephone to provide consumers with useful information about specials. And faced with increasing caller resistance, we imagine that survey groups, such as the Gallop Poll, might welcome the opportunity to compensate survey respondents so that they might be able to produce more representative samples.
We apply similar “name your own price” solutions to internalize the externalities of unsolicited spam email and junk mail.
* Townsend Professor, Yale Law School.
** Matthew Funk is an attorney at Simpson, Thacher & Bartlett and a research associate at Dartmouth College’s Institute for Security Technology Studies. Russ Atkind, Jennifer Brown, Ken Eichenbaum, Peter Siegelman Phil Spector and Nasser Zakariaya provided helpful comments.
A. Comparison With Improved
Initial Disclosure
B.
Comparison With Private and Public Interdiction
C.
Theoretical Critiques of Privacy Markets
1.
Sunstein’s Concern With Excessive Filtering
2.
Radin’s Concern with Commodification
3.
Allen’s Concern With Uncoerced Privacy
1.
Positive Externalities: Charities, Polling and Politics
2.
Policing “Consumer Consent”
IV. Applications to Junk Mail and Spam
“[T]he right of every person ‘to be let alone’ must be placed in the scales with the right of others to communicate.”
- Rowan v. Post Office Department, 397 U.S. 728, 736 (1970).
The billions of telemarketing calls that individuals endure each year are in aggregate a substantial invasion of residential privacy.[1] Who hasn’t been interrupted at the dinner table by an unwanted call pitching storm windows or mortgage refinancing? We all have stories of particularly outrageous or obnoxious calls.[2] Virtually no one likes the current system. We know telemarketing calls are a major pain. What goes unnoticed, however, is that these unwanted intrusions may represent the most frequent intrusion on people’s fundamental right to be left alone in their homes.
Telemarketers don’t bear the full costs of their marketing because they do not compensate recipients for the hassle of, say, being interrupted during dinner. Telemarketers bear the cost of their speaking, but not of residents’ listening[3] It can still be privately rational for a telemarketer to disturb 30 people, if he or she can succeed in making a high-profit sale to the 31st. Because of these externalized costs, telemarketers have an incentive to call too often. The traditional laissez faire approach has perversely created a public commons in an important aspect of domestic privacy—the residential telephone lines that literally reach into the most intimate spaces and moments of our lives.
The current legislative movement to combat this telemarketing abuse—promoting “don’t call” statutes—forces residents to make an unreasonable all-or-nothing choice: either they register on the state’s “don’t call” list and thereby opt out of all for-profit telemarketing calls or they remain subject to potentially unlimited telemarketing harassment. “Don’t Call” statutes have already been passed by twenty states and are in the works in four more. [4] Moreover, the FTC has just proposed promulgating a national “don’t call” registry that would give every U.S. citizen this all-or-nothing choice.[5]
While the “don’t call” registries are improvements over the status quo, they are unnecessarily over- and under-inclusive. Many of the residents who opt for “don’t call” status receive too few calls compared to what they would want if they were compensated; similarly, many of the residents that fail to register receive too many calls relative to what they would prefer if the telemarketers had to compensate them.
This article proposes to expand residents’ choices. Households should be allowed to decide how much they will be compensated for receiving telemarketing calls.[6] It’s technologically feasible to give households the ability to determine how much they will be compensated per minute for listening to a telephone pitch. This approach would allow consumers to recreate the effect of the current law by choosing either an infinite or a zero price.
But many consumers will choose intermediate amounts. Telemarketing like other forms of advertising can provide useful information to potential consumers. And telemarketers who have to compensate consumers have greater incentives to screen their call lists to focus their calling on consumers who are more likely to be interested in the information.
The result is a boon to consumers. On simple libertarian grounds, consumers are presumptively made better off by a regime that gives them greater freedom. More concretely, consumers will (1) receive fewer calls, (2) which will be more tailored to their interests and (3) be compensated (with amounts that they themselves have indicated are sufficient) for those calls they do receive.
This “name your own price” system may also benefit some telemarketers—even though they have to start compensating listeners. For some firms, our system would represent an increase in telemarketing freedom. Instead of prohibiting telemarketers from calling people on the “don’t call” list, telemarketers could call anyone—as long as they were willing to pay the person’s (potentially infinite) price. Even without the “don’t call” statutes, many people have privately opted out of the pools by making their numbers unlisted or by immediately hanging up on all such calls. Indeed, it has become something of a national pastime for consumers to devise new ways to detect and terminate telemarketing intrusions. But this current rush to judgment prevents even socially beneficial solicitations from being heard. Giving telemarketers the option of compensating consumers represents a new way for the most beneficial parts of the telemarketing industry to overcome consumer resistance. For example, we imagine that the Gallup Organization might welcome the opportunity to compensate survey respondents so that the polling firm could produce more representative samples.
Our system might also benefit telemarketers by making it possible to deregulate other aspects of the telemarketing industry. Federal law currently prohibits telemarketers from calling between 9 p.m. and 8 a.m..[7] and many states prohibit tape-recorded solicitations.[8] These laws make eminent sense in a world where consumers are not compensated. But in a world with consumer consent—in which consumers volunteer (for compensation) to listen to telemarketing solicitations—there is no longer a reason for such per se prohibitions. As a technological matter there is no reason why consumers couldn’t set different prices for different times of day or different types of solicitations. If the prohibition against tape-recorded messages were repealed, we could imagine local grocery stores or movie theaters using the telephone to provide consumers with useful information about specials. These telemarketers would have to pay the listeners, but with tape-recordings they would dramatically reduce the costs of speaking.
Make no mistake, we predict that some types of telemarketing calls would be driven into the dust bin of history by a system of mandated compensation. And a good thing too. Many telemarketing calls are not cost-justified when one takes into account the real costs of listening. Telemarketers under the current system don’t take into account the annoyance of the 50 consumers who fail to buy when they are trolling for the consumer who will bite. And perversely, the new “don’t call” laws exacerbate the overfishing problem—as telemarketers concentrate their attention on those consumers who fail to register. The likely result of this phenomenon is an inefficient unraveling—with too little telemarketing for those who register and too much for those who fail to register.
The technology for such a compensated-telemarketing system is no more complicated than existing 1-900 numbers. Under our preferred scheme, the telemarketers would be required to call from an “outgoing 1-900 number.” With existing 1-900 numbers a payment from the caller to the recipient is triggered when the caller dials into a 1-900 number. But with an outgoing 1-900 number, transfers based on a per-minute fee set by consumers would be made from the telemarketer to the consumer’s telephone bill when the telemarketer calls out from a 1-900 number.
This paper is divided into four parts. First, we address the problems of externalized costs created by the current laissez faire regime governing solicitation. Part II provides the affirmative case for creating a market in the right to be left alone. We explain the superiority of a market approach to alternative regimes and respond to a series of theoretical critiques found in the writings of Anita Allen, Peggy Radin and Cass Sunstein. Part three then goes on to discuss the details of implementation—including both voluntary and mandatory versions of our compensation system. We take on legal and practical challenges to making our mechanism work. Finally, part four considers how this “name your own price” solution could be analogously used to mitigate the problems of spam and junk mail.
Consumers, legislators and academics typically regard most kinds of direct marketing—unsolicited solicitations arriving by telephone, mail or the Internet—as a nuisance.[9] Legal scholars at least will recognize that this view makes sense given the formal as well as the colloquial meanings of the term—many direct marketing solicitations are not only irritating, they are also more burdensome to the recipient than beneficial to the sender. Parties that view solicitations as a nuisance naturally focus on developing methods for blocking it.
As emphasized above, this is a nuisance of a particularly important character. While many of us have gradually become inured to the unpleasant reality of telemarketing calls, it is useful to remember that this nuisance implicates the most basic sort of privacy—the right to be left alone in one’s home. Unlike other nuisances that need only seep across our property lines to be actionable, the telemarketing nuisance intrudes literally into the most intimates parts of our homes—our bedrooms, our kitchens our living rooms—because these are the very places where we want telephones to give us ready access to our friends and family and solicited contacts with the marketplace.
Federal law first recognized the nuisance of telemarketing in 1991. The Telephone Consumer Protection Act (TCPA), the first and still the most important federal legislation regulating telemarketing, found that “[m]any customers are outraged over the proliferation of intrusive, nuisance calls to their homes from telemarketers.”[10] The TCPA authorized the FCC to bar telemarketers from calling consumers who registered their phone numbers with a nationwide don’t- call list—and prohibited telemarketers from soliciting any consumers during the night or early morning. An intense lobbying campaign by the direct marketing industry convinced the FCC to adopt a similar but less consumer-friendly version of the don’t-call approach. In place of a national don’t call list, the FCC issued regulations providing that when a consumer asks a specific telemarketer to stop calling, the telemarketer is legally bound to comply with the request. Meanwhile, twenty states have created their own don’t-call lists.[11] These state laws mirror Congress’s assessment of the problem as well as its problem-solving approach.[12] Academics to date have also focused on blocking phone solicitations. All but one of the scholarly articles dedicated to reforming telemarketing recommends amplifying the don’t-call approach by requiring consumers to opt-in (instead of opt-out) or creating a nationwide list.[13] In each case, long anecdotes depicting telemarketing calls as a nuisance precede the authors’ recommendations that government should do more to suppress it.[14]
Unsolicited calls about magazine subscriptions and travel packages—much less emails advertising get-rich-quick schemes and hardcore pornography—are indeed annoying. But approaches that begin from the premise that telemarketing, spam and other kinds of direct marketing are a nuisance obscure the real problem: direct marketing is frequently a nuisance (in the formal sense of the term) because the legal regime does not compel direct marketers to internalize the full costs of their activities.[15]
Direct marketing imposes costs not merely on the businesses
that speak, but also on the consumers who listen.[16] And though it is hard to quantify the cost
of sorting through the advertisements that accumulate in one’s inbox during a
vacation, these kinds of intrusions provoke strong emotions among
consumers. For example, the first
large-scale use of spam—by a pair of attorneys, no less—provoked so many angry
responses (or “flames”) that the replies overloaded the spammers’ ISP, provoking
a temporary shutdown.[17] Most consumers’ frustration with spam,
moreover, pales compared to their exasperation when they receive a
telemarketing call during dinner.[18]
Because direct marketers do not internalize the full costs of their behavior, they solicit an excessively broad audience. Direct marketers have access to considerable information about individuals’ buying habits. This information allows them to assess whether a particular consumer is likely to purchase a specific product. But since direct marketers do not pay the costs they impose on consumers (and ISPs), they are less discriminating than they should be. When the publisher of a horse racing magazine solicits consumer who have not heretofore demonstrated any interest in the sport, that call or email probably is not cost-justified if the total social costs and benefits are reckoned. But if the publisher only calls or emails those persons who have wagered at OTB or purchased round trip tickets to Kentucky during early May, then there is a stronger likelihood that the benefits of the solicitation to the consumer and the publisher will outweigh the costs. Direct marketing is often net social waste because the legal system does not give sellers of niche products adequate incentive to target likely customers.
The most striking manifestation of this phenomenon is the fact that a substantial number of direct marketers make no effort whatsoever to screen their lists of offerees. These merchants frequently try to sell products appropriate for a narrow subset of consumers to everyone they can mail or phone. This phenomenon is most common on the Internet, where the non-reputational cost to the seller of sending a piece of spam to an additional consumer approaches zero. Emailing everyone is cheaper than paying to distinguish the likely prospects and usually generates at least a few additional sales.[19] Though the marginal cost of a solicitation is higher for telephone solicitation than spam, many telemarketers use the White Pages to compile their calling lists.[20] These companies have been distributing phonebooks (electronic or otherwise) to their salespeople ever since the federal government enacted regulations that effectively proscribed the use of automatic devices that sequentially dialed every combination of seven numbers in an area code. [21]
The prevalence of another automatic calling device underscores the fact that telemarketers do not internalize the negative externalities they create.[22] The overwhelming majority of telemarketers use a technology called predictive dialers (or autodialers).[23] These devices simultaneously dial batches of phone numbers and then route calls to salespeople when a consumer answers the phone. When too many consumers answer at once, the devices drop the surplus calls.[24] Nynex (now Verizon) has reported that the company receives 600 complaints per week about hang-ups that the company attributes to predictive dialers.[25] Telemarketers would be less likely to operate these devices at a rate fast enough to generate large numbers of hang-ups if they internalized the cost to consumers of rushing to answer the phone and hearing nothing but a dial tone when they picked up the receiver.[26]
Another indication that the current legal regime does not account for the negative externalities associated with direct marketing is the sheer volume of solicitations. While there is no definitive measure of the amount of telemarketing, all of the estimates are substantial. When it passed the TCPA in 1991, Congress found that 30,000 telemarketing firms were making more than 6.5 billion calls per year. That would mean U.S. households were receiving 18 million calls per day.[27] The FBI now estimates that there are 140,000 telemarketing firms in the United States. [28] If the number of calls per firm has remained constant (vis-à-vis the TCPA findings), then telemarketing firms would be making 30 billion calls per year—approximately 0.8 calls per household per day. [29] In fact, technological advances allow individual telemarketers to make many more sales calls per day.[30] This phenomenon lends credibility to statements by consumer advocates and telemarketing experts suggesting that consumers receive an average of two or more calls per day.[31]
The enormous—and growing—volume of solicitations[32] not only irritates consumers but also seems likely to damage the long-term business prospects of most telemarketers. Telemarketers are in an unsustainable position because the same legal regime that fails to account for the industry’s negative externalities also creates a tragedy of the commons. Like ranchers on a shared pasture or fishermen on an unregulated lake, telemarketers (and other direct marketers) overconsume a scarce resource: the time and attention of American consumers. Because telemarketers bombard consumers with solicitations—often advertising products unrelated to the listener’s interests—more and more consumers are determined to shut direct marketers out.[33] There are at least three manifestations of consumers’ growing determination to avoid being subjected to unsolicited solicitations: (1) declining response rates;[34] (2) increasing popularity of products and services that block direct marketing; and (3) a tide of recent legislation aimed at curbing telemarketing and spam.[35] Together, these phenomena constitute a looming crisis for the direct marketing industry.
Assessing changes in the percentage of consumers who respond favorably to sales calls is tricky but not impossible. We are not aware of any situations in which telemarketers released response rates.[36] Even if data were available, it would be difficult to compare statistics from different sources because the term “response rate” is so ambiguous and it is hard to compare statistics across time because the wider adoption of measures such as don’t-call lists and unlisted phone numbers has the perverse effect of appearing to increase the percentage of consumers who are receptive to telemarketing calls. In light of these constraints, one option is to rely on anecdotal reports that response rates have decreased over time.[37] A better approach, however, is to document the precipitous decline in response rates to public opinion polls conducted by phone.[38] Unlike telemarketing firms, polling organizations occasionally share their response rates with researchers and journalists.[39] In addition, there is less ambiguity about what constitutes a response to a survey. And quite apart from its value as a proxy, a decline in polling response rates will also be of interest because “a low response rate is one of the few outcomes or features that—taken by itself—is considered a major threat to the usefulness of a survey.”[40]
Polling response rates appear to have declined dramatically over the past few decades.[41] One leading authority observes that in their heyday phone surveys garnered response rates of 65% to 70%.[42] Just ten years ago, response rates were typically at least 50%.[43] Today, pollsters report response rates as low as 15% or 20%.[44] One academic study shows that the percentage of respondents who refused to be interviewed increased sharply between 1952 and 1979.[45] One indication that low response rates have become a serious problem for researchers is the fact that speakers at the polling industry’s premier gathering, the annual meeting of the American Association for Public Opinion Research (AAPOR), have devoted enormous attention to the topic. The 1999 AAPOR, for example, featured 6 panels and at least 17 presentations on the subject.[46]
Response rates to direct mail and spam have also declined precipitously. Though statistics are not available for the entire direct mail industry,[47] marketing firm BAIGlobal Inc. has been tracking response rates to credit card mailings since the mid-1980s. Response rates hit a new low during each of the past four years. In 2000, the most recent year for which statistics are available, credit card companies mailed out a record-high number of solicitations (3.54 billion solicitations, up from 2.87 billion in 1999) and their response rate declined from 1.0% in 1999 to just 0.6%.[48] Gauging changes in email response rates—and ascertaining the causes of these changes—is difficult for three reasons. First, there are widely divergent views about what constitutes a “response.”[49] Second, during the early years of Internet advertising, there were few if any entities using rigorous methodologies to document its development. Third, unlike other direct marketing mediums, the Internet has experienced rapid demographic changes over the past several years. These constraints aside, industry participants generally agree that spam response rates have declined to just a fraction of one percent—and that most of these responses are hate mail, notices of undelivered email, and messages requesting removal from the mailing list.[50] A leading Internet research firm predicts that as the volume of spam continues to rise, response rates will fall even further during coming years.[51]
The rising volume of unsolicited solicitations has also fueled the growing popularity of services that block direct marketing. Consumers’ efforts to avoid telemarketers are especially well-documented. The states with “don’t call” lists in operation for more than a few years have recently experienced explosive growth. Florida, for example, became one of the first states to create a don’t- call list back in 1990. The number of consumers registered with the Florida list has increased by more than 370% during the last 5 years.[52] States that created don’t-call lists during the past couple years have also experienced enormous demand. Six months before the Tennessee don’t call list became operational, the director of the Tennessee Regulatory Authority’s Consumer Division reported that his agency was already “swamped” with an “onslaught of calls” from persons anxious to register for the list.[53] New York residents, meanwhile, registered well over one million phone numbers for the state’s don’t-call list during the six month interval before the list became operational.[54] Connecticut just announced that during the first year in which its don’t call list was operational more than 700,000 out of its 3.4 million residents opted out of the telemarketing pond.[55] The number of consumers registered with the don’t-call list that the Direct Marketing Association distributes to its members has also increased.[56]
At the same time, more Americans than ever before are paying for services that allow them to avoid phone solicitations.[57] Between 1981 and 1996, the percentage of American consumers with unlisted phone numbers more than doubled—rising from 13.9% to 30%.[58] Caller ID was not available in all fifty states until 1996,[59] but already 39% of Americans subscribe to the service.[60] BellSouth is one of three Baby Bells that recently introduced a proprietary service to block telemarketing calls; though the service, Privacy Director, costs $5.95 per month plus a one-time fee of $19.95 as well as long distance and operator charges for each call intercepted, BellSouth reports that 150,000 customers have already signed up in Atlanta and South Florida alone.[61] The popularity of services such as Privacy Director and Caller ID, meanwhile, seems slight when juxtaposed against the ubiquity of anti-spam software. Every major email provider incorporates spam-blocking measures into its standard package. Indeed, companies such as Earthlink, America Online and Hotmail now seek to differentiate their services by advertising the particular technologies they have developed to fight spam. And this past winter, the “telezapper”—a device which admits a sound to induce autodialers to disconnect—was aggressively marketed as the perfect Christmas gift.[62]
State legislatures have also become more active participants in the struggle to curb spam and phone solicitations. In July 1997, Nevada became the first state to enact anti-spam legislation.[63] By November 1999, four states had passed statutes regulating the transmission of unsolicited commercial emails.[64] Today, at least eighteen states have enacted anti-spam laws.[65] These laws range from provisions banning deceitful practices such as “spoofing” or requiring mandatory labelling to laws banning spam outright.[66] The U.S. Congress is also considering a variety of anti-spam measures.[67] The spread of anti-telemarketing legislation has been slower but broader. A 1994 survey reports that at the time of publication six states had don’t-call lists.[68] The most recent Direct Marketing Association white paper, by contrast, reports that 20 states currently have don’t-call lists. Other kinds of telemarketing restrictions have also become more widespread since the early 1990s.
The recent behavior of legislators and consumers corroborates the tragedy of the commons hypothesis. Each kind of solicitation disturbs a consumer’s solitude to some degree.[69] The frequency with which direct marketers invade consumers’ physical privacy has left consumers weary of solicitations and resentful of the direct marketing industry.[70] In the none-too-distant future, spammers, telemarketers, direct mail specialists and door-to-door salesmen may all find themselves fishing the same empty lake.
The government can solve the tragedy of the commons and negative externalities problems by empowering consumers to set prices at which they are willing to receive different kinds of unsolicited solicitations. In essence, this approach creates a market for physical privacy.[71] Currently, telemarketers start out with the entitlement to call residents. Residents can often take action to take back this entitlement (by paying for an unlisted number or in some jurisdictions by adding their names to a “don’t-call” list). But residents don’t have an effective means of selling their physical privacy to telemarketing firms. A resident’s right to avoid unsolicited solicitations is thus effectively what Susan Rose-Ackerman termed “market inalienable.”[72] Residents can give away their privacy right (by failing to block such calls) or they can take steps to perfect their privacy rights, but they cannot sell their privacy right for money. The market inalienability of the consumer’s privacy right viz-a-viz business stands in great contrast to businesses’ privacy rights viz-a-viz consumers. For decades, businesses have used 1-900 numbers to force consumers to compensate the business for its time. Simply calling a 1-900 number triggers a per-minute payment from the consumer (easily collected through the consumer’s telephone bill) to the business. The simple proposal of this paper is to eliminate this asymmetry by allowing residents to freely alienate their rights to market privacy—that is, their right to be left unsolicited.
Part III will discuss the details of our proposals and a variety of regulatory choices that government needs to confront to implement a market system—including difficult questions concerning the boundaries of participation and the degree to which consumers can refine their pricing choices. But for now we discuss the relative merits and failings of a market approach at a more theoretical level.
A market approach would force direct marketers to internalize the costs they impose on consumers. As a result, a consumer would only receive a solicitation when the expected benefit to herself and the direct marketer exceeded the expected cost.[73] While telemarketing would still be unsolicited in the micro sense, consumers would in a macro sense solicit calls by posting a price at which they would be happy to listen. We should emphasize that household members would not have a duty to listen to telemarketing calls—they could still hang up as soon as they saw fit. But our “name your own price” mechanism means that—in contrast to the current system—consumers would effectively consent to receive the call and hence express a willingness to listen to the beginning of the pitch.[74] Accordingly, under our system both the speaker and the listener reveal their preference to initiate the conversation—thus suggesting expected gains of trade.
Residents will benefit in three concrete ways. First, they will receive fewer telemarketing calls. Second, the calls they do receive are likely to be more interesting—because telemarketers facing additional costs of communication are likely to undertake additional efforts to restrict their sales efforts to the subset of consumers that are especially likely to be interested in purchasing that vendor’s products. Consumers would have a simple means to adjust not only the volume of solicitations they received but also the frequency with which solicitations addressed their particular needs and interests. The more a consumer charges to listen to a phone solicitation (etc.), the more confident a prospective caller must be that the consumer will be receptive to his sales pitch. Finally, residents will receive a price that they individually deem to be adequate for the calls that they do receive.
In sum, our “name your own price” mechanism is likely to promote both social and consumer welfare. By revealed preference of speaker and listener, our mechanism tends to filter out communications where the social cost is greater than the social benefit— promoting social welfare. By giving consumers more choices than all-or-nothing alternatives, our mechanism presumptively increases their welfare.[75]
Given that telemarketing is widely regarded as a pariah industry that exists in large part because of these uncompensated, externalized costs imposed on households, it is particularly unnecessary for either equitable or efficiency reasons to show that a move to our mechanism also benefits telemarketers. Indeed, our mechanism will not benefit many telemarketers who for the first time would be forced to compensate listeners for their time. Surprisingly, however, requiring telemarke