Advertising Platforms and Privacy

We develop a general equilibrium model of informative advertising to examine the implications of privacy regulations on consumer welfare, focusing on its utilitarian aspects. In our model, firms reach consumers by placing ads on an advertising platform. Privacy regulations affect ad targetability by either facilitating or hindering the identification of consumers' preferences. The ad platform takes into account the level of targetability it can offer advertisers when choosing ad prices for different products. On the demand side, consumers are heterogeneous in their product preferences, and in how willing they are to consider a non-preferred product. We show that it is possible for some consumers to exhibit a preference for privacy purely for instrumental reasons. Our analysis characterizes the conditions under which the privacy preferences of different types of consumers will be aligned or opposed. The platform's market power in the ad market and the possibility of cross-selling in the product market—products intended for choosier consumers selling to consumers with flexible preferences under privacy— are critical factors. If all consumers were picky enough to only consider offers of their preferred product, then equilibrium will feature within-product competition only and all consumers (as well as the platform) will be indifferent between privacy and no privacy. On the other hand, if ad prices are exogenous to the privacy regime—as might be the case if the ad market were competitive—then all consumers prefer no privacy. In the popular discourse the issues around privacy are commonly posed as a tussle between the intrinsic privacy rights of consumers and the greater productivity of advertising under no privacy. This paper suggests that the terms of this debate are too narrow. Consumers can find value in privacy purely for instrumental reasons simply because the presence of consumers with flexible preferences introduces the possibility of greater competition in the product market leading to lower prices and greater consumption for some or all consumers.