Targeted Advertising and Pricing on the Internet
Mark Armstrong
University College London
Jevons conference on “Competition in Digital Media”
July 2010
Armstrong
Targeted Advertising and Pricing
Targeted Advertising
What’s the harm?
19th century retailer John Wanamaker: “Half the money I
spend on advertising is wasted and the trouble is I don’t know
which half”
not so di¤erent from “contextual” advertising (lipstick ads in
Vogue, etc.)
explains why newspapers in more segmented markets can
charge more per reader for advertising, and why online
advertisers are willing to pay more per click for longer search
terms
ignoring price e¤ects, expect consumers to bene…t if they see
ads tailored to their interests
but if advertisers can better target those consumers who like a
particular brand, likely to lead to less intense price competition
(Iyer, Soberman & Villas-Boas 2005)
Armstrong
Targeted Advertising and Pricing
Privacy Policy I
“Count not him among your friends who will retail your privacies
to the world” [Publius Syrus, 1st century BC]
Broader issue concerns collection and use of online tracking
data
could be used as basis for price o¤ers (see below)
privacy issues related to shared computer use (if ads for dating
websites pop up, say) or social network sites (Beacon on
Facebook)
Impractical, and probably undesirable, to prevent a …rm from
collecting information about its own customers
but need to give (legal) incentives to keep data secure (e.g.,
Thelma Arnold, Facebook)
Armstrong
Targeted Advertising and Pricing
Privacy Policy II
Impossible to give cast-iron commitment not to reveal
information to third party (e.g., some mergers appear to occur
for sole purpose of acquiring customer data)
Makes huge di¤erence whether consumers have to “opt in” or
“opt out” of permitting third party use of information
could be “behavioral”
or maybe many consumers are close to indi¤erent
are policy-makers su¢ ciently con…dent of the “correct policy”
to be used as default (in possible contrast to organ donation,
say)
don’t want to make consumers “consent” every time they visit
a website
force consumers to actively choose the settings on their web
browser (e.g., allow all cookies, deny all cookies, choose each
time), with no default?
Armstrong
Targeted Advertising and Pricing
Costs of an Interventionist Privacy Policy
[Goldfarb & Tucker 2010]
Europe since mid-1990s has more constraints on targeted
advertising than the US
Study reports e¤ectiveness of nearly 10,000 online display
advertising campaigns
in each campaign, half the consumers (who were already
selected as being suitable for the product) randomly saw the
targeted ad and half saw a placebo (for a charity typically)
di¤erence in the willingness to buy the product in the two
groups is the campaign’s “e¤ectiveness”
after the Privacy Directive was passed, advertising
e¤ectiveness fell in Europe by around 65%
if Europeans browsed US websites, e¤ectiveness was una¤ected
E¤ect most marked for “general interest” websites (news,
etc.), since they could not provide contextual advertising
privacy regulations could hit these content providers hardest
Armstrong
Targeted Advertising and Pricing
Targeted pricing I
Hard to distinguish targeted pricing from targeted advertising
Some consumer attributes may be less salient on the internet
e.g., minorities may be disadvantaged buying a car in person
but not online [Scott Morton, Zettelmayer & Silva-Risso 2003]
hard to do “high pressure selling” on the internet
Already seen in o- ine markets
mailing lists with demographic, etc., data are valuable
loyalty cards with personalised discounts
pricing low to new customers
Hard to verify it is going on online
seller can always claims it is engaging in a “pricing
experiment”, or there has been a software glitch
Armstrong
Targeted Advertising and Pricing
Targeted pricing II
Many ways to use browsing history or IP address to in‡uence
prices:
geographic location may be relevant (akin to “price ‡exing” by
chain stores)
browsing history may reveal information about income,
interests, brand preferences, propensity to compare prices
e.g., e-retailer may know whether consumer has come to it
directly from a price comparison website [Baye & Morgan
2002, Turow 2006]
e-retailer (e.g., travel site) may see that consumer searches for
‡ight with it, gets quote, then goes to rival website, then
comes back
Armstrong
Targeted Advertising and Pricing
Forms of price targeting I
[Armstrong 2006]
Sellers know a consumer’s willingness-to-pay (e.g., for
particular CD)
bad outcome for consumer under monopoly
with competition makes little di¤erence to price paid
Sellers know how “choosy” (or price sensitive) a consumer is
e.g., whether a consumer has come directly from a price
comparison site
expect targeted prices will harm choosy consumers and bene…t
price sensitive consumers
Armstrong
Targeted Advertising and Pricing
Forms of price targeting II
Sellers know which brand a consumer prefers
likely to work in every consumer’s favour
e.g., there are two brands, A and B, and 50% of consumers are
willing to pay £ 3 for A and £ 1 for B, while remaining
consumers have reverse preferences
without price targeting, each brand will choose price £ 3
(assuming no costs)
if separate prices can be targeted at the two kinds of
consumer, the preferred brand can now only charge £ 2
cannot make blanket statement that “consumers dislike
targeted prices”
Armstrong
Targeted Advertising and Pricing