Targeted Advertising: Strategic Mistargeting and Personal Data Opt-Out
43 Pages Posted: 17 Oct 2022 Last revised: 15 Mar 2023
Date Written: March 14, 2023
Abstract
We study the optimal targeting strategy of an advertiser and its implications on consumer's data privacy choices, which, in turn, affect the firm's targeting accuracy. 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 and consumers have no incentive to withhold information from the firm. In contrast, under endogenous price, a better prediction leads to a more targeted ad strategy although mistargeting still persists. It allows the advertiser to raise its price instead of diluting its recommendation power by exploiting its recommendation effect. Thus, it leads to a higher price and lower consumer welfare, which may incentivize consumers to opt-out of data collection.
Keywords: targeted advertising, recommendation, AI, algorithms, consumer inference, persuasion, pricing, privacy choice, personal data opt-out
JEL Classification: M37, M38, C72, D82, L00
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