Targeted Advertising and Consumer Privacy Concerns (PDF)

The rush of marketing expenditures in the Internet has made effectiveness and
efficiency increasingly relevant. In particular, online firms offering free content
need to provide powerful marketing tools to advertisers to support their own
business models. Behavioral targeting enables websites to selectively display
advertisements to consumers according to their surfing profiles, making
advertisements more relevant, and thereby increasing advertising revenues from
websites. Consequently, it is often seen as a savior by online firms struggling to
finance their free content. However, targeting can raise privacy concerns, leading
to negative consumer reactions. Furthermore, there is increasing regulatory
pressure for websites to inform surfers about targeting practices and provide them
with opt-in or opt-out functions. Proactively addressing those challenges to
sustain revenues from targeted advertising is highly important—in particular for
advertising-supported websites—and requires systematic research. Such research,
though, has to account for the fact that the profiling of consumers to increase
advertising revenues raises ethical questions, especially because targeting often
occurs without consumers’ knowledge.
This doctoral dissertation studies consumer privacy concerns with regard to online
targeting practices. Specifically, it investigates how privacy concerns affect
consumers’ perceptions of targeted advertisements. Furthermore, building on
social exchange theory, fairness norms, and previous research on consumer
privacy concerns in related areas, such as direct mail and e-commerce, I develop
tangible, managerial operational mechanisms to increase consumers’ acceptance
of targeting and improve consumers’ perceptions of targeted advertisements. In
order to ensure that these mechanisms are in line with principles of business
ethics, I derive normative requirements for these mechanisms from integrative
social contracts theory.
I test these mechanisms and explore the related cognitive processes in two
experimental studies – a laboratory and a large-scale field experiment on two
popular German websites.1 First, I find that under certain conditions, surfers are
highly motivated by reciprocity. Specifically, when reminded that targeted online
advertisements support free content and when asked to voluntarily reciprocate the
website for providing its free content, consumers do not only more readily consent
to targeting, but also perceive targeted advertisements as less intrusive. The effect
of appealing to reciprocity on consumers’ acceptance of targeting is driven by
consumers’ desire for distributive justice. It is not—as one might believe—driven
by selfish motives, such as the expectation of receiving free content in the future.
Second, in contrast to the current industry practice, I find that informing
consumers that targeting makes advertisements they see on the Internet more
interesting to them does not have any significant effect. This finding shows that
there is currently great potential for the online advertising industry to change the
way it promotes and justifies targeting to consumers. Finally, I find that providing
consumers with a high level of control over their information not only increases
their perceptions of procedural justice, but also reduces privacy concerns,
increases trust, and thus the acceptance of targeting. As such, my research
suggests that it is advisable to allow consumers to access and edit the anonymous
profiles stored in their cookies—a practice currently followed by very few
websites and advertising networks.
Overall, this doctoral dissertation contributes to a very new academic research
field studying targeted online advertising and consumer privacy concerns. In
contrast to previous studies, which have all described the challenges related to
privacy concerns, this study focuses on reconciling consumers’ legitimate desire
to protect their privacy and the interests of the Internet industry which requires
powerful marketing tools. Thus, from a practical perspective, this dissertation
identifies mechanisms for websites in general and for ‘free content’ websites in
particular to sustain or even increase their advertising revenues. As such, my
findings may help advertising-supported online businesses to keep their services
free of charge and thereby to sustain the consumer surplus they generate. Through
the combination of real behavioral and self-reported data, the findings are
particularly robust and might further stimulate the debate on consumer privacy,
advertising effectiveness, and the financing of free content among academics,
practitioners, and regulators.