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The potential for underinvestment in internet security: implications for regulatory policy

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  • Alfredo Garcia
  • Barry Horowitz

Abstract

With the continuing growth of the use of the Internet for business purposes, the consequences of a possible cyber attack that could create a large scale outage of long time duration becomes a more and more serious economic issue. In this paper, we construct a game-theoretic model that addresses the economic motivations for investment in added Internet security and makes a case for a possible market failure in the form of underinvestment in the provision of Internet security. This result relies on the fact that the social value derived from consumption (which is at least equal to a fraction of the surplus derived from e-commerce) greatly exceeds the revenue at stake associated with the telecommunications companies’ and ISP’s security levels. If the ratio of social value to revenue at stake to Internet providers continues to grow, the likelihood of underinvestment in security becomes higher and some form of regulation may become necessary. We discuss the difficulties associated with designing and enforcing a regulatory scheme based upon mandatory security standards. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Alfredo Garcia & Barry Horowitz, 2007. "The potential for underinvestment in internet security: implications for regulatory policy," Journal of Regulatory Economics, Springer, vol. 31(1), pages 37-55, February.
    • Handle: RePEc:kap:regeco:v:31:y:2007:i:1:p:37-55
    DOI: 10.1007/s11149-006-9011-y
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    References listed on IDEAS

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    1. Martin Cave & Robin Mason, 2001. "The Economics of the Internet: Infrastructure and Regulation," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 17(2), pages 188-201, Summer.
    2. Giovannetti, Emanuele, 2001. "Perpetual Leapfrogging in Bertrand Duopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 671-696, August.
    3. Esther Gal-Or & Anindya Ghose, 2005. "The Economic Incentives for Sharing Security Information," Information Systems Research, INFORMS, vol. 16(2), pages 186-208, June.
    4. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(4), pages 659-679.
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    Citations

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    Cited by:

    1. Alessandro Fedele & Cristian Roner, 2022. "Dangerous games: A literature review on cybersecurity investments," Journal of Economic Surveys, Wiley Blackwell, vol. 36(1), pages 157-187, February.
    2. Alexander A. Ganin & Phuoc Quach & Mahesh Panwar & Zachary A. Collier & Jeffrey M. Keisler & Dayton Marchese & Igor Linkov, 2020. "Multicriteria Decision Framework for Cybersecurity Risk Assessment and Management," Risk Analysis, John Wiley & Sons, vol. 40(1), pages 183-199, January.
    3. Berg, Nathan & Kim, Jeong-Yoo, 2022. "Optimal online-payment security system and the role of liability sharing," Economic Modelling, Elsevier, vol. 110(C).
    4. Kathryn Merrick & Medria Hardhienata & Kamran Shafi & Jiankun Hu, 2016. "A Survey of Game Theoretic Approaches to Modelling Decision-Making in Information Warfare Scenarios," Future Internet, MDPI, vol. 8(3), pages 1-29, July.
    5. Liao, Chun-Hsiung & Chen, Chun-Wei, 2014. "Network externality and incentive to invest in network security," Economic Modelling, Elsevier, vol. 36(C), pages 398-404.

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    More about this item

    Keywords

    Internet Security; Market Failure; Game Theory; Nash Equilibrium; Markov perfect equilibrium; L51; L86; C72; C73; K23;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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