Irrelevant Advertising: How More Consumer Tracking can Make Ads Less Effective

The online activity of consumers is routinely tracked, not just by visited websites, but also by an increasing number of third-parties who embed their tracking cookies within various websites. This tracked information is sold to advertisers who then use it to identify and target potential new consumers with their ads. In this paper, we build a game theoretic model to show that the presence of such third-party information can not only reduce advertiser profits, but also create a dead-weight loss under certain conditions.

The outcomes depend on two key parameters in our model - the degree of horizontal differentiation among competing advertisers, and the incremental utility a consumer gets from seeing an ad. We find that only when the degree of horizontal differentiation is low or when ads do not increase consumer utility by much, do advertisers benefit from third-party information. In all other cases, advertiser profits are lower than they would have been without third-party information. We describe two mechanisms which cause a reduction in advertiser profits – increased cost of advertising, and `irrelevant' advertising. Thus, we find that more consumer information can, under certain conditions, cause less effective targeting. We also show that such `irrelevant' ads reduce consumer surplus, since consumers miss out on seeing more relevant ads that could have increased their utility. This leads to a dead-weight loss due to third-party tracking. In an extension, we model the externality caused by disabling third-party tracking by some consumers.