Observable Cyber Risk on Cournot Oligopoly Data Storage Markets

Ulrik Franke and Amanda Hoxell
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Ulrik Franke: RISE Research Institutes of Sweden, P.O. Box 1263, SE-164 29 Kista, Sweden
Amanda Hoxell: Department of Mathematics, Uppsala University, P.O. Box 480, SE-751 06 Uppsala, Sweden

Risks, 2020, vol. 8, issue 4, 1-15

Abstract: With the emergence of global digital service providers, concerns about digital oligopolies have increased, with a wide range of potentially harmful effects being discussed. One of these relates to cyber security, where it has been argued that market concentration can increase cyber risk. Such a state of affairs could have dire consequences for insurers and reinsurers, who underwrite cyber risk and are already very concerned about accumulation risk. Against this background, the paper develops some theory about how convex cyber risk affects Cournot oligopoly markets of data storage. It is demonstrated that with constant or increasing marginal production cost, the addition of increasing marginal cyber risk cost decreases the differences between the optimal numbers of records stored by the oligopolists, in effect offsetting the advantage of lower marginal production cost. Furthermore, based on the empirical literature on data breach cost, two possibilities are found: (i) that such cyber risk exhibits decreasing marginal cost in the number of records stored and (ii) the opposite possibility that such cyber risk instead exhibits increasing marginal cost in the number of records stored. The article is concluded with a discussion of the findings and some directions for future research.

Keywords: Cournot market; oligopoly; market concentration; cyber risk; data breach; digital services (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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