Monday, July 08, 2013

Behavioral Targeting: The Holy Grail of Online Marketing

Behavioral targeting, under which users are presented with advertisements based on their past browsing and search behavior and other available information (e.g., hobbies registered on a website), has been hailed as the new Holy Grail in online advertising.We will refer to the economic implications when an online publisher engages in behavioral targeting. Revenue for the online publisher in some circumstances can double when using behavioral targeting. On the other hand, increased revenue for the publisher is not guaranteed: in some cases the prices of advertising and hence the publisher's revenue can be lower, depending on the degree of competition and the advertisers' valuations. Although social welfare is increased and small advertisers are better off under behavioral targeting, the dominant advertiser might be worse off and reluctant to switch from traditional advertising.

A simple question

Who benefits (and what are the conditions required) from behavioral targeting as compared to traditional advertising? Would the online publisher benefit from the targeting of advertisements? Because of the increased effectiveness of behaviorally targeted advertisements, conventional wisdom would suggest that the answers to these questions are easily predicted, as summed up in an article in the Economist about behavioral targeting:  [...], Advertisers will be prepared to pay more to place ads, since they are more likely to be clicked on. That in turn means that websites will be able to charge more for their advertising slots.  (Economist, 2008)

However, this expected relationship between charges and clicks does not necessarily emerge when the advertisement slot is auctioned off . Instead, using targeted advertisements turns out to be similar to product differentiation: it causes relaxed competition between the advertisers, and hence it is possible that advertisers need not pay as much as they do under traditional advertising. That is, by focusing on a specific user segment, an advertiser's advertisement may be selected with a relatively low price on this segment, whereas under traditional advertising his advertisement would never have been selected or would have been selected only at a higher price. This competitive effect can depress the online publisher's income by realizing a lower revenue per click-through.

Competitive and Propensity effect

On the other hand, the negative effect of relaxed competition for online publishers might be off set by a positive propensity effect. Through targeting advertisements,the probability of a click-through is increased resulting in a higher volume of click-throughs, which positively contributes to the publisher's revenue. Whether the publisher can benefit from behavioral targeting depends on the trade-off between the competitive effect and the propensity effect. Behavioral targeting outperforms traditional advertising only if the competitive effect is dominated by the propensity effect. In particular,when the advertisers competing for the advertising space are comparable and the number of advertisers is large, behavioral targeting generates more revenue for the publisher. This gain under behavioral targeting is increasing in user heterogeneity and the number of advertisers, and the expected revenue for the publisher can double compared to traditional advertising.

 Online consumer heterogeneity: An advertiser for each face.


The whole research,conducted by Jianqing Chen and Jan Stallaert,University of Texas and Connecticut respectively, proved that that the effect of behavioral targeting on different advertisers' payoffs is asymmetric. While small advertisers are generally better off under behavioral targeting by winning their favorable users, the dominant advertiser may or may not be better off .The dominant advertiser is worse off under behavioral targeting when it has a significant competitive advantage over its competitors because under traditional advertising, he would otherwise grab a larger group of users and still realize a decent payoff . The real benefit brought by the increased effectiveness of behavioral targeting is realized in social welfare. In the end,the social welfare of both publisher and advertisers can be maximized under behavioral targeting.