Not All Privacy Is Created Equal: The Welfare Impact of Targeted Advertising

What is it about?

We analyze the welfare implications of consumer data sharing, and restrictions to that sharing, in the context of online targeted advertising. Targeting technologies offer firms the ability to reach desired audiences through intermediary platforms. The platforms run auctions in real time to display ads on Internet sites, leveraging consumers' personal information collected online to personalize the ads. The online advertising industry posits that targeted advertising benefits advertising firms (that is, merchants who want to target ads to the desired consumers), consumers who see ads for preferred products, and the intermediary platforms that match consumers with firms. However, the claims that targeted advertising benefits all players involved have not been fully vetted in the literature. We develop an analytical model to analyze the economic and welfare implications of targeting technologies for those three players under alternative consumer information regimes. The regimes differ in the type and amount of consumer data available to the intermediary and to the advertising firms, and reflect the presence or absence of technological or regulatory restrictions to personal information flows. We find evidence of incentive misalignment among the players, as the intermediary prefers to share only a subset of consumer information with firms, whereas advertising firms prefer having complete information about the consumers. As such, a strategic intermediary with the ability to control which information is shared during the auction can have an incentive to use only the information that maximizes its payoff, overlooking the interests of both advertising firms and consumers. The information regimes that maximize consumer welfare vastly differ depending on consumers' heterogeneity along two dimensions: a horizontal dimension, capturing consumer's heterogeneity in product preferences; and a vertical dimension, capturing consumers' heterogeneity in purchase power. Consumers prefer none of their personal information being used for targeting only in limited circumstances. Otherwise, consumers are either indifferent or prefer only specific types information to be used for targeting.

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