Modeling the Effect of Consumer Utility through Personalized Services and Compensating Variance through Greater Product Variety on Increased Spending in Online Advertisements

Abstract

Extending and combining concepts from consumer surplus of product availability and personalization strategies under privacy concern we made a model to comprehend and justify the reasons for the increase in the spending on online advertisements. We inductively found that with higher capability to sell increased product variety online and with high consumer utility from personalized services, investment in online advertisement will rise with a greater exponential slope and reach the saturation point much later than with lower levels of consumer utility and product variety. First, we linked online advertisement with technology adoption, by using decision-theoretic model to understand the probabilistic outcomes of when a firm decides to wait and observe and when it decides to adopt. Then we tried to comprehend the implications of consumer utility through personalized services and the compensating variance through increased product variety. Considering, that Internet adoption like most technology adoption will follow an S-curve we inductively concluded, along with attached evidences, that spending in online advertisements will follow the same path. The slope, inflection point and the saturation point of the curve will depend on the ability to increase consumer utility through personalization and the consumer variance with increased product variety. Combining the concepts we also stated that a firm is more likely to adopt online advertisement as a media for marketing if these two features are optimized.