Advertising and Price Competition Under Consumer Data Privacy Choices

Abstract

Recent privacy regulations and firm policies endow consumers with the choice of whether to allow firms to use their personal data for marketing (and other) purposes. We investigate the impact of consumer data privacy choices on the advertising ecosystem. We consider a scenario with competing horizontally differentiated firms that advertise to heterogeneous consumers, through an ad platform, to be considered by the consumers. If a consumer opts in, she provides an imperfect signal of her type, based on which the ad platform can price ads, and the firms can target ads and prices. Consumers make privacy choices by considering their surplus utility from product consumption. In particular, they consider two countervailing effects of opting-in to allow firms to use their data: (i) opting-in, while weakly increasing the relevance of ads served, exacerbates price discrimination by firms; and (ii) opting-in facilitates firms' inferences about the consumers' types, which intensifies price competition. These effects depend crucially on the consumers' ad exposure histories, which in turn are determined endogenously by the ad platform's ad pricing strategy. Compared to a benchmark where all consumers are opted-in to data sharing, with privacy choices consumers' surpluses are weakly higher, the firms' profits are weakly lower, and the ad platform's profit is either lower or higher depending on the signal accuracy and extent of product differentiation. We examine the robustness and boundaries of our insights by considering extensions and alternative models.