Targeted Advertising and Consumer Information

Abstract

Using ever-increasing amounts of data, firms are able to link the valuations of consumers with the information they possess about a product. We analyse the impact of that new ability on the advertising strategy of a monopolist. If there is a positive correlation between consumers' valuations and their information then, in contrast to the literature, better targeting often reduces prices. A lower price does not necessarily lead to a higher consumer surplus: some high-valuation/high-information consumers may stop purchasing because they stop receiving ads. Because of the interplay between the targeting and the pricing strategies, consumer surplus and welfare may be increasing in the advertising cost. Finally, we highlight that the link between valuation and information poses new problems for the estimation of returns to advertising.