Working Paper: CEPR ID: DP13793
Authors: Simon P. Anderson; Alicia Baik; Nathan Larson
Abstract: We study list price competition when firms can individually target discounts (at acost) to consumers afterwards, and we address recent regulation (such as the GDPRin Europe) that has empowered consumers to protect their privacy by allowing themto choose whether to opt in to data-gathering and targeting.In equilibrium, consumers who can be targeted receive poaching and retentiondiscount offers from their top two firms. These offers are in mixed strategies, butfinal profits on such a consumer are simple and Bertrand-like. More contestableconsumers receive more ads and are more likely to buy the wrong product. Poachingexceeds retention when targeting is expensive, but this reverses when targeting ischeap.Absent opt-in choice, firm list pricing resembles monopoly, as marginal consumersare lost to the lowest feasible poaching o¤er, not to another firm's list price. Opt-inchoice reintroduces the standard margin too on those who opt out.The winners and losers when targeting is unrestricted (rather than banned) de-pend on the curvature of demand. For the empirically plausible case (convex butlog-concave), targeting pushes up list prices, reduces profits and total welfare, and(if demand is convex enough) hurts consumers on average. Outside of this case,more convex (concave) demand tends to make targeting more advantageous to firms(consumers).We then use our model to study the welfare effects of a policy that forbids targetedadvertising to consumers who have not opted in. Consumers opt in or out dependingon whether expected discounts outweigh the cost of foregone privacy. For empiricallyrelevant demand structures, allowing opt-in makes all consumers better-off.
Keywords: targeted advertising; competitive price discrimination; discounting; privacy; GDPR; opt-in
JEL Codes: D43; L12; L13; M37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Targeting (L21) | Higher list prices (D49) |
| Targeting (L21) | Reduced profits (D33) |
| Targeting (when demand is convex) (D43) | Reduced consumer welfare (D11) |
| Opt-in policy (M38) | Altered consumer behavior (D12) |
| Opt-in policy (M38) | Market outcomes (D49) |
| Targeting is cheap (D49) | Competition sorts consumers (L13) |
| Competition sorts consumers (L13) | Affects purchasing behavior (F61) |