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61 UCLA L. Rev. 606 (2013-2014)
Free: Accounting for the Costs of the Internet's Most Popular Price

handle is hein.journals/uclalr61 and id is 596 raw text is: Free: Accounting for the Costs
of the Internet's Most Popular Price
Chris Jay Hoofnagle
Jan Whittington
Offers of free services abound on the Internet. But the focus on the price rather than
on the cost of free services has led consumers into a position of vulnerability For
example, even though internet users typically exchange personal information for the
opportunity to use these purportedly free services, one court has found that users of free
services are not consumers for purposes of California consumer protection law. This
holding reflects the common misconception that the costs of free online transactions
are negligible-when in fact true costs may be quite significant. To elucidate the true
costs of these allegedly free services, we apply a transaction cost economics (TCE)
approach. Unlike orthodox economic theory, TCE provides a framework for analyzing
exchanges in which the price of the product seems to be zero. Under a TCE analysis,
we argue that information-intensive companies misuse the term free to promote
products and services that involve numerous nonpecuniary costs. In so doing, firms
generate contractual hazards for consumers, ignore consumer preferences for privacy,
and mislead consumers by creating the impression that a given transaction will be free.
While psychological research and behavioral economics may support an outright ban
of free offers because of their biasing effects, TCE suggests reforming governance
structures to place the business risks associated with free transactions more firmly in
the hands of businesses. We suggest alterations to governance structures-such as the
Federal Trade Commission's Guide Concerning Use of the Word Free (FTC Guide)-to
curb the incentives of firms to raise transaction costs for consumers. The FTC Guide
provides support for two of the consumer protection measures we propose: first, a
requirement that free service providers clearly disclose that such providers seek users'
personal information in exchange for those services, and, second, the establishment of
a regular price before providers can market a service as free. We further argue that the
recognition of users of free services as consumers for purposes of consumer protection
law would better align incentives and ensure users access to legal redress against some of
the most popular services on the Internet. Lastly, we suggest the adoption of alternative
governance structures designed to reduce the cost of transacting by curbing the
collection of personal information from consumers of free services and by enhancing
the rights of consumers to govern the dispersal of personal information from free online
services to third parties.

61 UCLA L. REv. 606 (2014)

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