The welfare and allocative impact of targeted advertising

We investigate the welfare implications and the allocative effects of different consumer data-handling regimes in online targeted advertising. We develop a three-players model that includes firms, consumers, and an intermediary - the ad exchange - And analyze three scenarios that differ in the type of consumers' data available during the targeting: A case in which only the horizontal information (consumers' brand preferences) is available; a case in which only vertical information (consumers' purchasing power) is available; a case in which both pieces of information are available. We find that there exist conditions under which the intermediary obtains the highest proportion of benefits from targeting and, in general, the intermediary's incentives regarding the type of consumer information to be used for targeting are misaligned with the incentives of firms and/or consumers. Furthermore, consumers' surplus from targeting is higher when only specific types of personal information are made available during the targeting process.