Targeted Advertising as Implicit Recommendation: Strategic Mistargeting and Personal Data Opt-out

We study an advertiser’s targeting strategy and its effects on consumer data privacy choices, both of which determine the advertiser’s targeting accuracy. Targeted ads, serving as implicit recommendations when consumer preferences are uncertain, not only influence the consumer’s beliefs and purchasing decisions, but also amplify the advertiser’s temptation toward strategic mistargeting: sending ads to poorly matched consumers. Our analysis reveals that advertisers may, paradoxically, choose less precise targeting as accuracy improves. Even if prediction is perfect, the advertiser still targets the wrong consumers, leading to strategic mistargeting. Nevertheless, consumer surplus can remain positive because of improved identification of well-matched consumers, thereby reducing the incentive for consumers to withhold information. However, the scenario shifts with endogenous pricing; better prediction leads to more precise targeting although mistargeting persists. To exploit the recommendation effect of advertising, the advertiser raises prices instead of diluting recommendation power, lowering consumer welfare and prompting consumers to opt out of data collection. Furthermore, we investigate the impact of consumer data opt-out decisions under varying privacy policy defaults (opt in versus opt out). These decisions significantly affect equilibrium outcomes, influencing both the advertiser’s targeting strategies and consumer welfare. Our findings highlight the complex relationship between targeting accuracy, privacy choices, and advertisers’ incentives.