Online Advertising and Privacy
Alexandre De Corniere
University of Oxford
Romain De Nijs
Paris School of Economics (PSE)
March 18, 2013
An online platform makes a profit by auctioning an advertising slot that appears whenever a consumer visits its website. Several firms compete in the auction, and consumers differ in their preferences. Prior to the auction, the platform gathers data which is statistically correlated with consumers' tastes for products. We study the implications of the platform's decision to allow potential advertisers to access the data about consumers' characteristics before they bid. On top of the familiar trade-off between rent extraction and efficiency, we identify a new trade-off: the disclosure of information leads to a better matching between firms and consumers, but results in a higher equilibrium price on the product market. We find that the equilibrium price is an increasing function of the number of firms. As the number of firms becomes large, it is always profitable for the platform to disclose the information, but this need not be efficient, because of the distortion caused by the higher prices. When the quality of the match represents vertical shifts in the demand function, we provide conditions under which disclosure is optimal.
Number of Pages in PDF File: 31
Keywords: online advertising, privacy, information disclosure, auctions
JEL Classification: D4working papers series
Date posted: December 19, 2012 ; Last revised: August 13, 2013
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