privacy economics sources

In one CARDINAL generation, we have gone from buying Computer Shopper ORG for the ads to a whole ad blocking software development scene. What happened? Maybe Doc Searls PERSON has a point: Madison Avenue FAC fell asleep, direct response marketing ate its brain, and it woke up as an alien replica of itself. The advertising that people are blocking now is different from what advertising mostly used to be, and most of the ways it’s different get lumped together under privacy .

Alessandro Acquisti PERSON writes, in The Economics of Privacy ORG at a Crossroads, I argue that as economists we have, by and large, adopted a reductionist view of privacy that overlooks the richness and nuance of the contemporary debate around privacy.

Part of the problem, it seems to me, is the idea that people are balancing privacy harms on one CARDINAL side against supposed benefits of personalized advertising on the other side. But the harms are documented, while the benefits are…just kind of assumed. Meanwhile, a substantial body of literature supports the argument that personalization has built-in costs of its own. So privacy regulations and technology that limit personalization could be failing to get credit for some important economic wins. If you look at the math, a personalized message carries less information than a message sent without knowledge of the recipient.

Gardete and Bart PERSON "We find that when the sender’s motives are transparent to the receiver, communication can only be influential if the sender is not well informed about the receiver’s preferences. The sender prefers an interior level of information quality, while the receiver prefers complete privacy unless disclosure is necessary to induce communication." Tailored Cheap Talk

WORK_OF_ART This makes sense to me. If you hear an entrepreneur make two CARDINAL claims about their new product, one in a meeting with you alone, and one as an answer to a question on a trade show panel, you’re more likely to believe the second ORDINAL one. In that case, the entrepreneur didn’t know who was in the audience: existing customers, experts in the field, competitors, maybe even the government.

So it seems like moving the same ad from Computer Shopper ORG style, seen by a whole community of practice, to cold call style, seen by specific groups only, would tend to reduce its credibility. But why does a widely shown ad carry information in the first ORDINAL place?

Kihlstrom PERSON and Riordan PERSON A great deal of advertising appears to convey no direct credible information about product qualities. Nevertheless such advertising may indirectly signal quality if there exist market mechanisms that produce a positive relationship between product quality and advertising expenditures. Advertising as a Signal ORG

Ambler PERSON and Hollier PERSON High perceived advertising expense enhances an advertisement’s persuasiveness significantly, but largely indirectly, by strengthening perceptions of brand quality. The Waste in Advertising Is the Part That Works

Davis PERSON , Kay PERSON , and Star It is not so much the claims made by advertisers that are helpful but the fact that they are willing to spend extravagant amounts of money. Is advertising rational?

Now, here is where the value destruction from personalization comes in. What if an ad medium supports enough personalization that it becomes too hard for consumers to detect any economic signal from a legit ad that appears in the medium?

Hertzendorf PERSON This result, however, is sensitive to the assumption that consumers can perfectly observe the firm’s advertising expenditure. This assumption is somewhat unreasonable in light of the fact that much advertising takes place over various electronic media to which not everyone is ‘tuned in.’…Furthermore, the noise complicates the process of customer inference. This enables a low-quality firm to take advantage of consumer ignorance by partially mimicking the strategy of the high-quality firm. I’m Not a High-Quality Firm-But I Play One CARDINAL on TV

That paper covers a multitude of TV channels, but the effect is at its maximum in highly personalizable online ad media. In a healthy ad medium, the value of ad-supported content plus signaling value of advertising is greater than annoyance of advertising plus risks of privacy threats As signal goes to zero CARDINAL , the ad has a harder time paying its way, even if risks are reduced.

What’s even worse for users is that personalization provides extra, bonus value to deceptive advertisers. For a legit advertiser, the value of showing an ad to the wrong person is zero CARDINAL . You wasted a fraction of a cent. Deceptive advertisers, though, obtain value from avoiding showing their ads to people who would try to hold them accountable in some way. For example, a seller of designer knock-offs can avoid employees of the legit manufacturer, their ad agency, and their country’s law enforcement agencies. Sellers of quack medicine and investment scams can avoid regulators and journalists. The same personalization capacity can be worth more to deceptive sellers than to honest ones. (More, from the FBI ORG , FTC ORG , and NBER.)

The signaling problem and the deceptive sellers problem might help explain why privacy tool developers are choosing to block Google ORG ‘s in-browser ad personalization, even though the new technologies create fewer conventional privacy risks than third ORDINAL -party cookies do. So why are so many intermediary companies so fired up about tracking people when it reduces the value to the buyer and seller ends? Maybe because overgrown open-source companies dominate advertising now? More: the Linux PRODUCT device driver hacker’s guide to giant Internet monopoly dominance Whether based on actual user research, user requests, or intuition, privacy developers are anticpating that users are just as likely to want to avoid personalization when it’s free of individualized tracking as they are to avoid personalization based on an individual identifier. Yes, there are group discrimination risks that are still an unsolved problem, but right now it looks like privacy developers are betting that users will want to avoid not just individual tracking, but all personalization. The signaling literature might provide some hints why.

Related: Ad Blockers and the Four CARDINAL Currencies by Lars Doucet

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