The Effects of Microtargeting on Conversion Rates and the Role of Information Asymmetry
57 Pages Posted: 2 Aug 2023
Date Written: July 30, 2023
Behavioral advertising targets consumers based on their personal characteristics, while contextual advertising is based on the content consumers are currently viewing. Nowadays, many websites employ a combination of the two, known as microtargeting, to display more tailored ads to consumers. Although it is debated whether using behavioral data benefits or harms publishers' revenues, the prevailing belief has been that more personalized ads always yield higher conversion rates. However, recent empirical evidence indicates that less targeted ads can sometimes achieve equal or even greater conversion rates.
We introduce a game-theoretic model to investigate this phenomenon and explain why disabling microtargeted behavioral advertising can sometimes result in increased conversion rates and publisher revenue simultaneously. We link this outcome to the information asymmetry present in the online advertising market. Allowing third-party cookies on a website enables some advertisers to access behavioral data from large ad exchanges, a privilege not universally available. Moreover, not all advertisers have the advanced tools necessary to leverage this additional information effectively. We show that such information asymmetry can reduce market efficiency. Surprisingly, disabling microtargeting can create a more efficient market by providing equal opportunities to all advertisers, despite them being less informed.
Keywords: Online advertising, Targeting, Information asymmetry, Conversion rate, Ad revenue, Auction theory
JEL Classification: D44, D82, M31, M37
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