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Ad networks, consumer tracking, and privacy

Florence, March 25th 2017

EUI Media Conference 2017

Anna D’AnnunzioTelenor Research

Antonio RussoETH Zurich

Ad networks

• Digital publishers can outsource sale of ads to ad networks

• Google ad network (AdSense) reaches:• ~40% of (Alexa) top 500 sites (Roesner et al., 2012) • ~94% of total internet audience (Comscore, 2016)

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Publisher 1

Publisher 2

AN Advertisers

Tracking and multi-homing• Advertisers and consumers multi-home

• Consumers spread attention over several websites• Problem: no tracking across publishers, higher chance of

repeated impressions• Ad inventories lose value with multi-homing (Ambrus et

al., 2016)

• Ad networks:• Centralize sale of ads, internalize external effects due to

multi-homing• Track consumers across publishers, reduce repetition

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Privacy and tracking• Some consumers see tracking as a violation of their privacy

• 84% of U.S. respondents does not want advertising tailored on their behavior on the internet (Turow et al., 2009)

• A variety of techniques allows consumers to avoid being tracked (e.g. browser plug-ins, anonymizing apps)

• Idea: model the between link privacy preferences, tracking and advertising market

• EU and US authorities are discussing do-not-track policies• E.g., FTC “do not track proposal”

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Research questions• What is the role of ad networks in the online advertising

market?• How does tracking affect the supply of ads?• Does supply of ads increase with an ad network compared

to the case where publishers compete?

• Which privacy policy is desirable when the effects on the advertising market are considered?• Effect of tracking and consumers’ choice to block it on

welfare and consumer surplus• Market failures and regulation

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Previous literature• Analysis on supply of ads with single-homing

consumers: Anderson and Coate, 2005

• Multi-homing consumers: Ambrus et al., 2016;Anderson et al., forthcoming; Athey et al., forthcoming• We add tracking by ad networks and privacy-related

choices

• Targeting and ad-avoidance: Johnson, 2013• Ad-avoidance ≠ cookies blocking

• Advertising and privacy regulation: Campbell et al.,2015; Goldfarb and Tucker, 2011• No effect on supply of ads and no welfare analysis

Model overview

• Publishers: free for consumers and advertising-financed• Ad network can track consumers• Two scenarios:

• Outsourcing to AN• Competition among publishers without AN

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Publisher 1

Publisher 2

ANConsumers Advertisers

Consumers• Unit mass, 𝑢", 𝑢$ ~ℎ 𝑢", 𝑢$

𝐷"$ = 𝑃𝑟 𝑢" − 𝛿𝑞" ≥ 0; 𝑢$ − 𝛿𝑞$ ≥ 0 𝐷2 = 𝑃𝑟 𝑢2 − 𝛿𝑞2 ≥ 0; 𝑢3 − 𝛿𝑞3 < 0 𝑖, 𝑗 = 1,2; 𝑖 ≠ 𝑗𝐷: = 1 − 𝐷" − 𝐷$ − 𝐷"$𝑞2: ad level on 𝑖; 𝛿: nuisance cost of ads

• Property: ;<=>;?@

< 0; ;<=>;?@

= − ;<A;?@

• Also: consumers choose to block/allow tracking (e.g. thirdparty cookies)• I will discuss this in the second part

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Advertisers• Unit mass, homogeneous• Advertiser surplus: 𝐷"𝑟" + 𝐷$𝑟$ + 𝐷"$𝑟"$C

• Normalize return from informing a consumer to 1

• 𝑟2 𝑚2 : prob. informing a SH (𝑟2E > 0, 𝑟2EE < 0)

• 𝑟"$C 𝑚",𝑚$, 𝛽 : prob. informing a MH;H=>I

;J@> 0, ;>H=>I

;J@> < 0, ;>H=>I

;J@ ;JA< 0

• 𝛽: cross-publishers tracking effectiveness;H=>I

;K> 0 and ;>H=>I

;?@ ;K> 0

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Timing

0. Ad Network deals with publishers (outsourcing of ad inventory)1. Publishers choose ad level 𝑞2.2. Consumers choose whether to block tracking which

publisher to visit 3. AN sells impressions to the advertisers4. Consumers get utility, get informed, payoffs realized

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Ad network: contracts• Advertisers:

• Ad network unique gatekeeper to consumers• Offer to each advertiser 𝑚",𝑚$ impressions per consumer

[at eq. 𝑚2 = 𝑞2], in exchange for lump-sum transfer 𝑝NO

𝑝NO = 𝑟"𝐷" + 𝑟$𝐷$ + 𝑟"$C 𝐷"$• Publishers

• AN acquires right to sell ad inventory of publisher i, offers per impression price 𝑥2 𝑞2

• In equilibrium, 𝑞2NC: 𝑚𝑎𝑥 ?@,?A 𝑝NO

Effect of tracking on advertisinglevels• Assuming symmetry:

𝜕𝑞2NC

𝜕𝛽 > 0 ⟺ 𝐷"$𝜕$𝑟"$C

𝜕𝑞2𝜕𝛽+𝜕𝐷"$𝜕𝑞2

𝜕𝑟"$C

𝜕𝛽 > 0

• 𝐷"$;>H=>I

;?@;K> 0: tracking increases revenues on infra-marginal

multi-homers

• ;<=>;?@

;H=>I

;K< 0: tracking increases opportunity cost of losing

marginal multi-homer (;<=>;?@

< 0 and ;H=>I

;K> 0)

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Competing publishers, no outsourcing• Differences wrt AN model:

• Revenue per MH changes without tracking (𝛽 = 0)

𝑟"$C > 𝑟"$_C > 0 ;H=>I

;?@> ;H=>`I

;?@> 0

• Publishers offer contracts 𝑝2, 𝑞2𝑝2 = 𝑟2𝐷2 + 𝑟3𝐷3 + 𝑟"$_C𝐷"$ − 𝑟3𝐷3 + �̂�3𝐷"$

= 𝑟2𝐷2 + 𝑟"$_C − �̂�3 𝐷"$𝑖 = 1,2

• Publishers decide ad levels 𝑞2b: 𝑚𝑎𝑥?@𝑝2

Total advertiser surplus Advertiser surplus on 𝑗

Value SH Incremental value MH

Competition Vs AN

• 𝑞2NC > 𝑞2b iff

𝐷"$𝜕𝑟"$C

𝜕𝑞2−𝜕𝑟"$_C

𝜕𝑞2+𝜕𝐷"$𝜕𝑞2

𝑟"$C − 𝑟"$_C + �̂�3 − 𝑟3 c?@d?@

e,2d",$

> 0

• Tracking increases MR on infra-marginal MHs and increases opportunity cost of losing marginal MH

• Joint control: • opportunity cost for AN of marginal ad on 𝑖: 𝑟"$f − 𝑟3• opportunity cost for publisher 𝑖 : 𝑟"$f − �̂�3

Tracking effect Joint control effect

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Consumers’ blocking choice

• Disutility from being tracked: 𝜃~𝐹 0, �̅� , 𝜃 ⊥ 𝑢2, 𝑢3• Consumers block iff 𝜃 ≥ 𝑐 (cost of blocking)

• AN’s ability to track determined by consumers• share of consumers tracked (i.e. not blocking) is 𝛽

• Privacy has only intrinsic value (Acquisti et al. 2014)• Extension: blocking affects disutility from ads (privacy

intermediate good)

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Welfare• 𝑊 = 𝐶𝑆o − 𝐶𝑆p + 𝐴𝑆

• Consumer surplus from content 𝐶𝑆o:∑ ∫ ∫ 𝑢2 − 𝛿𝑞2 ℎ 𝑢2, 𝑢3 𝑑𝑢2𝑑𝑢3

u?A:

vu?@

�2 + ∫ ∫ x𝑢2 −

vu?A

vu?@

𝛿𝑞2 + 𝑢3 − 𝛿𝑞3yℎ 𝑢2, 𝑢3 𝑑 𝑢2𝑑𝑢3

• Disutility privacy loss 𝐶𝑆p:

z 𝜃𝑓 𝜃 𝑑𝜃K

:+ 1 − 𝛽 𝑐

• Advertiser surplus 𝐴𝑆: 𝐷"𝑟" + 𝐷$𝑟$ + 𝐷"$𝑟"$C

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Second best (SB) tracking

• Regulator controls the tracking, publishers decide ad levels

𝜕𝑊𝜕𝛽 = −

𝜕𝐶𝑆p𝜕𝛽 +

𝜕𝐶𝑆o𝜕𝑞2

𝜕𝑞2NC

𝜕𝛽 +𝜕𝐶𝑆o𝜕𝑞3

𝜕𝑞3NC

𝜕𝛽 +𝜕𝐴𝑆𝜕𝛽 = 0

• Tracking at equilibrium may be too low compared to SB

• Always the case if ;?@|I

;K< 0

• Tracking may be too low even if objective is consumer surplus

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Externality on otherconsumers

Externality onadvertisers

Internalized− − +± ±

Policy implications

• Promoting cookies blocking (e.g. FTC’s “do not track”) may not be beneficial for welfare and not even for consumers

• It may be desirable • to reduce consumers’ disutility from being tracked (e.g.,

forbid intrusive third-party cookies) • to increase perceived cost of blocking tracking (e.g., opt-out)

• Reducing disutility from being tracked or cost of blocking reduce the net disutility from privacy losses 𝐶𝑆p …

• … but have opposite effects on advertising market18

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Conclusion

• More efficient tracking technologies by ad networks mayreduce the advertising consumers are exposed online

• Policy-makers should consider the effect on the supply of ads when designing digital privacy regulation

• Encouraging the use of tools that prevent firms from collecting data about consumers to deliver advertising may have adverse effects on both consumers and society

Extension: privacy as intermediate good

• Farrell (2012): privacy is a final and an intermediate good• Consumers’ choice to block cookies change the ads they

see, hence their disutility from advertising

• Formally:

�− 𝛿 − 𝑧 𝑞2 − 𝜃ifnotblockcookies− 𝛿 𝑞2 − 𝑐ifblockcookies

• The marginal multi-homer blocking cookies depend on 𝑞2• Preliminary analysis: results of the main model confirmed

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Welfare analysis

• Effect of AN

• If 𝑞2NC < 𝑞2bconsumer and advertiser surplus are higher when advertising is outsourced

• Otherwise, conflicting interests: consumer surplus is higher when publishers compete directly, and advertiser surplus lower

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Micro-foundation (1/4)

• Interpretation: an advertiser buys ads to reach most interested consumers

• 𝑁 advertisers, each two ad messages • Informing a consumer is worth:• first message 1 (mainstream product)• second message 𝑦 < 1 (e.g., niche product)

• 𝑥2�: probability a consumer registers an ad by advertiser 𝑎when exposed to it on publisher 𝑖 = 1,2• 𝑥2�~𝑈 0,1 : i.i.d. for all consumers, publishers, advertisers

• Assumption: each advertiser buys at most one impression on a consumer on a given publisher

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Micro-foundation (2/4)

• Publishers send ads to consumers with largest 𝑥2�

• Advertiser 𝑎 buys 𝑚2� ad impressions on 𝑖

𝑚2� = 1 − �̅�2� 𝐷2 + 𝐷"$

�̅�2�: consumer with higher 𝑥2� receives an ad on 𝑖 from 𝑎Perfect internal tracking: no repeated internal impressions

• Hence:

�̅�2� = 1 −𝑚2�

𝐷2 + 𝐷"$• Expected prob. consumer on 𝑖 registers an ad by 𝑎:

z 𝑥𝑑𝑥"

�̅@�

=12 1 − �̅�2� $

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Micro-foundation (3/4)

• Revenues from SH:

𝑟2� = 𝐷2𝛼2 z 𝑥𝑑𝑥"

�̅@�

+ 𝐷"$𝛾2 z 𝑥𝑑𝑥"

�̅@�

𝛼2 (resp., 𝛾2) probability that a SH (resp., MH) watches an ad when impressed on 𝑖

• Revenues from MH without tracking:𝑟"$�_OC

= 𝐷"𝛼" z 𝑥𝑑𝑥"

�̅=�+ 𝐷$𝛼$ z 𝑥𝑑𝑥

"

�̅>�

+ 𝐷"$ 𝛾" z 𝑥𝑑𝑥"

�̅=�+ 𝛾$ z 𝑥𝑑𝑥

"

�̅>�− 𝛾" z 𝑥𝑑𝑥

"

�̅=�𝛾$ z 𝑥𝑑𝑥

"

�̅>�24

Micro-foundation (4/4)

• Revenues from MH with tracking:• AN observes 𝑥2� for a consumer, and decides whether to

impress her. Next, AN observes with prob. 𝛽 whether the selected consumer has already been informed by 𝑎's message on 𝑗. Then, AN decides whether to send the first or the second message from 𝑎𝑟"$�_C

= 𝐷"𝛼" z 𝑥𝑑𝑥"

�̅=�+ 𝐷$𝛼$ z 𝑥𝑑𝑥

"

�̅>�

+ 𝐷"$ 𝛾" z 𝑥𝑑𝑥"

�̅=�+ 𝛾$ z 𝑥𝑑𝑥

"

�̅>�− 𝛾" z 𝑥𝑑𝑥

"

�̅=�𝛾$ z 𝑥𝑑𝑥

"

�̅>�

+ 𝐷"$𝛽𝑦 𝛾" z 𝑥𝑑𝑥"

�̅=�𝛾$ z 𝑥𝑑𝑥

"

�̅>�

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