Customer Purchase Journey, Privacy, and Advertising Strategies

We investigate the impact on the online advertising ecosystem of tracking consumers’ activities on the Internet. We also study the impact of regulations that, motivated by privacy concerns, endow consumers with the choice to have their online activity be tracked or not (e.g., the General Data Protection Regulation passed by the European Union in 2018). The consumers’ strategic decisions to (dis)allow advertisers from tracking their activities depend on two aspects of privacy: its intrinsic value (protect privacy for its own sake) and its instrumental value (compromise privacy if doing so indirectly leads to some utility-enhancing outcome). This opt-in decision impacts the precision of inferences by advertisers about how far down a consumer is in the “purchase funnel” for a product by virtue of ads shown previously. The structure of the purchase funnel creates an interdependence between the effectiveness of the sequence of ads shown, which in turn affects advertising strategies. For instance, we find that the intensity of advertising by advertisers is nonmonotonic in the effectiveness of ads. Consequently, consumers may opt-in to be tracked when ad effectiveness is intermediate. While privacy regulations generally increase consumer surplus, the implications for the ad network are mixed. Interestingly, the ad network’s profit may (i) be higher under endogenous tracking than under full tracking, and (ii) decrease as ads become more effective. We discuss managerial implications for advertisers as well as policy implications for regulators.