Behind Privacy Labels: Data Tracking and Advertising Competition on App Platforms

Recently, a controversial new privacy policy on mobile app platforms, which requires app developers to display privacy labels and explicitly request data-tracking permissions from users, has sparked a heated discussion among practitioners in digital advertising. In this paper, we build a game-theoretic model to examine how this new policy impacts the key stakeholders of a mobile app platform (i.e., app developers, the platform, and consumers). The model captures how the new policy prompts developers to expand their strategies beyond pricing by introducing data-tracking levels as an additional competitive dimension, which in turn affects the intensity of price competition. We find that while implementing a policy restricting developers’ tracking of consumers may increase the platform’s advertising revenue, it can also put the platform at a disadvantage. This is because it may incentivize developers to lower their prices and engage in more intense price competition, consequently reducing the platform’s commission revenue. Regarding app developers, the new policy may prove beneficial despite its restriction to tracking only consumers who have opted in. Another noteworthy finding is that while platforms have asserted that the new policy is aimed at safeguarding consumers’ privacy, it does not always serve consumers’ best interests. Our paper provides meaningful implications for all key stakeholders of mobile app platforms regarding the implementation of the new privacy policy.