Who Welcomes Behavioral Targeting: An Economic Analysis

Recently there has been an increased interest in using targeted advertising online: a user is presented with advertisements that are more suitable, based on her past browsing and search behavior and other available information (e.g., her gender and age information registered on a website). This technique is known as behavioral targeting and besides receiving scrutiny from user advocacy groups as being potentially intrusive to online privacy, has been hailed as the new Holy Grail in online advertising. In this paper, we study the economic implications when an online publisher engages in behavioral targeting and selects an advertisement based on the best t with a user. The online publisher auctions o the advertising slot and is being paid on pay-perclick basis. Using a horizontal di erentiation model, we show that revenue for the online publisher may in some circumstances double when using behavioral targeting. In addition, we demonstrate that almost all advertisers are better o under this scheme and prove how these results are strongly a ected by the number of advertisers and valuations of click-throughs.