The Welfare Impact of Targeted Advertising

We analyze how alternative consumer data handling regimes affect the welfare of consumers, advertising firms, and an intermediary Ad exchange in the context of targeted advertising. We find that the collection and use of consumer data for targeting purposes affect consumer welfare through three distinct, and possibly countervailing, effects: match improvement, offer discrimination, and supply expansion. Furthermore, we find that the economic interests of the three agents can be misaligned, depending on the degree of heterogeneity in consumer preferences. Finally, we find that a strategic intermediary may choose to share with advertising firms only a subset of consumer data, maximizing its profits at their cost. In situations where the intermediary has an incentive to reveal the information that maximizes its payoff, overlooking the other agents’ interests, regulation of data collection and sharing may increase consumers’ welfare.