Targeted Advertising as an Implicit Recommendation and Personal Data Opt-Out

41 Pages Posted: 17 Oct 2022

See all articles by Z. Eddie Ning

Z. Eddie Ning

University of British Columbia (UBC) - Sauder School of Business

Jiwoong Shin

Yale School of Management

Jungju Yu

College of Business, Korea Advanced Institute of Science and Technology (KAIST); affiliation not provided to SSRN

Date Written: October 5, 2022

Abstract

Advances in data collection and algorithms help advertisers to better target individual consumers by predicting each consumer's preferences. We first show that when consumers have uncertainties about their preferences, an ad targeted to a consumer carries an implicit message: the algorithm predicts that the product fits her preferences. This implicit recommendation influences the consumer's purchase decision but also introduces misaligned incentives. As the accuracy improves, consumer inference from targeted ads becomes stronger, but so does the advertiser's incentive to exploit it to affect the consumer's decision. Under exogenous price, when individual-level prediction becomes more accurate, the advertiser adopts a less targeted advertising strategy due to its enhanced incentive to exploit a stronger recommendation effect. Even if the firm's prediction is perfectly accurate, consumers still receive ads for "bad products" and make incorrect purchase decisions. Despite these negative consequences, the consumer surplus can remain positive because the firm can better identify consumers with a good fit for the product. In contrast, under endogenous price, a better prediction allows the advertiser to raise its price instead of exploiting its recommendation effect. Thus, it leads to more targeted advertising and lower consumer welfare, which may incentivize consumers to opt-out of data collection.

Keywords: AI, algorithms, targeted advertising, recommendation, persuasion, pricing, privacy choice, personal data opt-out

JEL Classification: M37, M38, C72, D82, L00

Suggested Citation

Ning, Z. Eddie and Shin, Jiwoong and Yu, Jungju, Targeted Advertising as an Implicit Recommendation and Personal Data Opt-Out (October 5, 2022). Available at SSRN: https://ssrn.com/abstract=4239159 or http://dx.doi.org/10.2139/ssrn.4239159

Z. Eddie Ning

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Jiwoong Shin

Yale School of Management ( email )

165 Whitney Avenue
PO Box 208200
New Haven, CT 06520
United States
2034326665 (Phone)
06520 (Fax)

HOME PAGE: http://faculty.som.yale.edu/JiwoongShin/

Jungju Yu (Contact Author)

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

affiliation not provided to SSRN

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