Behavioral Advertising and Consumer Welfare

Abstract

Online behavioral advertising has raised privacy concerns due to its dependence on extensive tracking of individuals' behaviors and its potential to influence them. Those concerns have been often juxtaposed with the economic value consumers are expected to gain from receiving behaviorally targeted ads. Those purported economic benefits, however, have been more frequently hypothesized than empirically demonstrated. We present the results of two online experiments designed to assess some of the consumer welfare implications of behaviorally targeted advertising using a counterfactual approach. Study 1 finds that products in ads targeted to a sample of online participants were more relevant to them than randomly picked products but were also more likely to be associated with lower quality vendors and higher product prices compared to competing alternatives found among search results. Study 2 replicates the results of Study 1. Additionally, Study 2 finds the higher product relevance of products in targeted ads relative to randomly picked products to be driven by participants having previously searched for the advertised products. The results help evaluate claims about the direct economic benefits consumers may gain from behavioral advertising.

Keywords: Privacy, Economics of Privacy, Online Advertising, Behavioral Advertising