The Effects of Microtargeting on Conversion Rates and the Role of Information Asymmetry

Behavioral advertising targets consumers based on who they are, while contextual advertising targets consumers based on what they see. In many websites today a combination of the two (referred to as microtargeting) is used to offer more targeted ads to consumers. It is an ongoing debate in the industry and the academic literature whether more precise targeting, using behavioral data of consumers, can benefit or hurt publishers' revenues. However, there is still not a lot of research on the effects of microtargeting on the conversion rates of ads. In this paper, we study a game-theoretic model of an advertising market and show the surprising result that when a publisher turns off micro-targeted behavioral advertising he can sometimes not only increase his revenue but also the advertisers' conversion rates. We link this phenomenon to the information asymmetry that exists in the online advertising market, where some advertisers have access to behavioral data that might not be available to other advertisers. We show that this information asymmetry can reduce the efficiency of the market. By disabling microtargeting, efficiency can be improved, counterbalancing the fact that all advertisers are now less informed, and lead to higher conversion rates.