An Economic Analysis of Online Advertising Using Behavioral Targeting

MIS Quarterly, 38(2), 429-449, 2014.

51 Pages Posted: 20 Mar 2011 Last revised: 2 May 2015

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Jan Stallaert

University of Connecticut - School of Business

Date Written: August 1, 2010

Abstract

Recently there has been an increased interest in using targeted advertising online: users are presented with advertisements that are a better match, based on their past browsing and search behavior and other available information (e.g., hobbies registered on a website). This technique, known as behavioral targeting, has been hailed as the new “Holy Grail” in online advertising because of its potential effectiveness. In this paper, we study the economic implications when an online publisher engages in behavioral targeting. The publisher auctions off an advertising slot and is paid on a cost-per-click basis. Using a horizontal differentiation model to capture the fit between a user and an advertisement being displayed, we identify the factors that affect the publisher's revenue, the advertisers' payoff, and social welfare. We show that revenue for the online publisher in some circumstances can double when using behavioral targeting. On the other hand, increased revenue for the publisher is not guaranteed: in some cases the prices of advertising and hence the publisher's revenue can be lower, depending on the degree of competition and the advertisers' valuations. We identify two effects associated with behavioral targeting: a competitive effect and a propensity effect. The relative strength of the two effects determines whether the publisher's revenue is positively or negatively affected. We also demonstrate that although social welfare is increased and small advertisers are better off under behavioral targeting, the dominant advertiser might be worse off and reluctant to switch from traditional advertising.

Suggested Citation

Chen, Jianqing and Stallaert, Jan, An Economic Analysis of Online Advertising Using Behavioral Targeting (August 1, 2010). MIS Quarterly, 38(2), 429-449, 2014.. Available at SSRN: https://ssrn.com/abstract=1787608 or http://dx.doi.org/10.2139/ssrn.1787608

Jianqing Chen (Contact Author)

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Jan Stallaert

University of Connecticut - School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

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