Are There Economic Grounds for Regulating Behavioral Ads?

Abstract

Advocates for regulating behaviorally targeted advertisements tend to focus on ethical and legal justifications for regulation. Meanwhile, the advertising technology industry has staunchly opposed regulation by drawing on economic arguments, contending that such regulation would be harmful to advertisers, consumers, publishers, and data intermediaries alike -- ultimately undermining innovation and accessibility of free products across the Internet. In this Article, we provide a critical economic perspective to the regulatory debate. We analyze the theoretical and empirical economic literature on the costs and benefits of privacy regulation in the context of behavioral advertising to evaluate the strength of economic arguments for and against regulation. We find that economic analyses traditionally used to make anti-regulation arguments are incomplete and myopic, as they focus only on the short-term effects of regulation and a subset of stakeholders affected by the online data economy, rather than how any value created by data-intensive behavioral targeting is distributed among the entire online advertising ecosystem. We argue that recent enforcement actions against ad-technology firms and movements across the world for online privacy regulations may be justifiable not only on ethical or moral grounds, but also on economic grounds. Our analysis complements and contributes to legal scholarship on privacy harms and antitrust regulation by incorporating economic literature on harms and benefits of privacy regulation across the data economy, and challenging a key assumption used by the ad-tech industry in the privacy debate: that economic arguments support anti-regulatory positions. Rather than resulting in a loss of welfare for consumers, regulation can result in a reduction of harms and a more balanced allocation of the costs and benefits of data accumulation.

Keywords: behavioral advertising, data privacy, privacy regulation