Trade in Data: Regulating Cross-Border Data Flows

Multinational companies can enhance product quality worldwide using data collected in different countries. Central to the ability of firms to improve their products is the decision of countries to allow data flows across borders. We analyze the impact of restrictions on international data openness on market structure, welfare, and the demand for policy coordination. When a country allows its data to flow across borders: (i) consumer utility is shifted upward by a data-driven network effect; (ii) firms lower their prices to reach a larger demand and be more competitive by enjoying a stronger network effect, which increases consumption and benefits consumers; (iii) the number of varieties decreases, which may lower welfare overall. By allowing firms to export data, a country exerts a negative externality on the rest of the world: consumers abroad benefit from higher per product utility, but openness also lowers the number of varieties, which can reduce welfare in foreign countries. Therefore, even when policymakers unilaterally restrict the outgoing flows of data to protect domestic consumer privacy, they may set a degree of openness above the global optimum, requiring a data-sharing agreement restricting further cross border data flows to maximize global welfare. We provide policy implications of our results in the context of the ongoing artificial intelligence revolution.