The Welfare Impact of Targeted Advertising Technologies

Information Systems Research

60 Pages Posted: 14 Apr 2017 Last revised: 9 Mar 2021

See all articles by Veronica Marotta

Veronica Marotta

University of Minnesota - Twin Cities - Carlson School of Management

Yue Wu

University of Pittsburgh - Katz Graduate School of Business

Kaifu Zhang

Alibaba Group

Alessandro Acquisti

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Date Written: February 5, 2021

Abstract

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.

Keywords: Informational Privacy, Targeted Advertising

JEL Classification: M37, D18

Suggested Citation

Marotta, Veronica and Wu, Yue and Zhang, Kaifu and Acquisti, Alessandro, The Welfare Impact of Targeted Advertising Technologies (February 5, 2021). Information Systems Research , Available at SSRN: https://ssrn.com/abstract=2951322 or http://dx.doi.org/10.2139/ssrn.2951322

Veronica Marotta (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Yue Wu

University of Pittsburgh - Katz Graduate School of Business ( email )

PA 15260
United States

Kaifu Zhang

Alibaba Group

Alessandro Acquisti

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States
412-268-9853 (Phone)
412-268-5339 (Fax)

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