Market Failure Mechanisms in Cybersecurity

The non-profit Privacy Rights Clearinghouse maintains an ongoing chronology of significant data breaches in its efforts to raise awareness about consumer privacy issues. During 2011 alone, Privacy Rights Clearinghouse reported 535 breaches compromising millions of records. In the age of the Internet, cybersecurity will necessarily remain a vital concern. The economics of cybersecurity is still an emerging discipline ripe for future research, addressing such issues as forced private information disclosure to governments, potential market regulation schemes and their efficacy, the development of insurance markets, improving risk modeling, and the very nature of cybersecurity as a public or private good. This article presents a review of research on the structure of the cybersecurity market and its failure. It critiques, summarizes and synthesizes research in this field from a market failure point of view. The present paper highlights market failure mechanisms in cybersecurity: lack of competitiveness, information asymmetry, externalities, principal-agent issue, market instability and the inefficacy of market regulation