The focus of the discussion here will be on market failure under the contractual approach. The key market failures with respect to privacy concern information and bargaining costs. A member of the ICA, for instance, would have ready access to details about how customer information will be generated, combined with other databases, or sold to third parties. The customer may face significant costs simply in trying to learn and understand the nature of a company's privacy policies. The costs of learning about companies' policies are magnified by the difficulty customers face in detecting whether companies in fact are complying with those policies.
Customers can try to adopt strategies for monitoring whether companies have complied.
For instance, if a person contracted with several companies that promised not to sell her name to third parties, she could report a different middle initial to each company. She could then identify the company that broke the agreement by noticing the middle initial that later appeared on an unsolicited letter or e-mail. A member of the ICA, for instance, could use existing technology to cross-check her address with her real name, and thereby insert her correct middle initial. The cost and ineffectiveness of monitoring logically leads to over-disclosure of private information. Consider the incentives facing a company that acquires private information.