Targeted Advertising and Consumer Inference
Jiwoong Shin and Jungju Yu
Published in Marketing Science, December 2020
In “Targeted Advertising and Consumer Inference,” Jungju Yu, Assistant Professor in the Department of Marketing and co-author Professor Jiwoong Shin, Professor of Marketing at the School of Management, Yale University, capture the phenomenon that consumers tend to respond differently to ads depending on the perceived targeting accuracy. Consumers are exposed to several pharmaceutical ads on TV, for instance Entresto for heart failure prevention, but they tend to ignore such ads.
“Surprisingly, we find that when similar ads are shown on their personalized Facebook feed, they are likely to respond differently and even become concerned about their heart condition,” says Yu.
The main distinction between the two channels—TV and Facebook feed—is targeting precision. And, consumers’ reaction to ads can be affected by the targeting accuracy of the channel. This research asks how should firms cope with competition in targeted advertising while taking into account the consumers’ response to targeted ads.
“We show that firms have an incentive to engage in a greater amount of targeted advertising in order to obtain prominence, i.e., become consumers’ first shopping stop.”
Moreover, in equilibrium, upon being targeted by a firm, consumers make more positive inferences about the product category as well as the quality of the advertiser. With such an improved impression, a targeted consumer is more likely to engage in a costly search throughout the category. The authors find that the increase in consumer search creates an advertising spillover beyond the level of the mere awareness effects of advertising, and that firms' equilibrium level of targeted advertising can be non-monotonic in targeting accuracy. Additionally, they show that sometimes, it can be optimal for firms to relinquish customer data and instead engage in non-targeted advertising.
Findings in the paper provide insights into how firms should tradeoff between the prominence that targeted advertising affords and the advertising spillover effect created by consumer search, and engage in optimal targeted advertising. The paper also provides a guideline for how firms should use customer data in targeted advertising when facing increasingly aware consumers who make inferences rationally and respond actively to being targeted.