Proceedings of the 8th International Conference on Research in Management and Economics
Year: 2023
DOI:
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Personalized Digital Advertising and User Privacy Protection in A Competitive Two-Sided Marketplace
Xinxin Zhang
ABSTRACT:
Personalized advertising services, while enabling online platforms to reach target users accurately and thus attract advertisers, have also led to privacy concerns. Based on a game-theoretic model, we demonstrate the strategic effects of user privacy controls on competition in the online advertising market. We fully describe the market conditions for the provision and adoption of privacy controls, and when provision and adoption are actually profitable for platforms and users. In particular, we show that platforms will not provide privacy protections voluntarily in the face of heterogeneity in targeting preferences between user and advertiser communities. The analysis yields three main insights. First, we show that enhanced user privacy protections may have unintended consequences, typically leading to an increase in the market share of the high-targeting platform among users and a decrease in the average targeting level offered to advertisers. Second, although it is intuitively necessary to deter privacy invasion by allowing users to close personalized advertising when the privacy concern is sufficiently high, such measures can instead reduce social welfare. Third, we demonstrate that the protection of user privacy can be leveraged to improve payoffs in a competitive two-sided marketplace at different levels of technology.
keywords: user privacy, personalized digital advertising, two-sided marketplace