Information Asymmetry Between Consumers and Digital Advertisers
When George Akerlof wrote the essay, "The Market for Lemons," he would never have envisioned that digital commerce in the twenty-first century would be characterised by massive proportions of asymmetric information between corporations and online advertisers. With regard to the relationship between advertisers and consumers, one party is aware of very specific details regarding the other party's usage of the internet while the party being targeted by the advertiser (in this instance, the consumer) has very little or no knowledge of this information being collected about them. This represents, therefore, a very significant economic distortion, and therefore has significant and measurable economic consequences.
What Advertisers Know About You, and How Advertisers Know it
The sheer volume of information collected about individual users by various companies is nothing short of staggering. By 2023, the data broker sector alone was worth $317 billion (the data collected by the companies listed above is included in this figure in addition to Acxiom and Experian Marketing Services). Acxiom and Experian Marketing Services produce detailed consumer data profiles based on approximately 1,500 different data points for each individual, which may include purchase history, search location, political affiliation, health-related searches, and inferred emotional state based on their online activity.
The overall economic framework that supports the advertisers' ability to create data profiles of consumers is based on data being a non-rivalrous good in economic terminology. Therefore, data will continue to grow in value for advertising companies because it will always be generated via marketing activity, while there are essentially zero costs associated with accumulating and storing data today. Furthermore, storage costs of electronic data from the year 2000 to 2020 fell by nearly a factor of 30; thus, advertisers now have nearly no additional costs associated with accumulating and retaining data. Advertisers are willing to pay a premium for accurate, targeted advertising opportunities; in 2023, Meta's average advertising revenue per user in the US and Canada was $68.44, representing a significant indicator of the relative value of behavioural profiles to advertisers and the value these profiles hold in generating revenue.
Now, by leveraging all the data they collect about individual consumers, advertisers can better understand customer behaviour and greatly enhance their targeting capabilities, determining which advertisements to deliver to which consumers. For instance, while consumers in a geographic area generally see a billboard, a programmatic advertisement can target a specific male who has a gym membership and has searched using the term "lower back pain" on the internet, all on a Tuesday night.
Effects on Consumer Welfare and Market Efficiency
Economic damage from this asymmetry occurs in two well-documented ways. Price discrimination, which consumers cannot see or challenge because of asymmetric information, is one such mechanism. A study conducted in 2020 by the Norwegian Consumer Council found that travel companies regularly adjusted their prices according to the type of device the consumer used, where they were located, and their presumed income, with price differences as high as 20%. Consumers therefore believe they are using a transparent process to discover an appropriate price; in reality, however, they are playing a game in which they do not know the rules.
Secondly, asymmetric information has a distorting effect on consumer behaviour that welfare models cannot fully capture. Behavioural economics distinguishes between stated preference and revealed preference. The preferences that consumers exhibit for a product, when those preferences are created by micro-targeted nudges cannot be considered genuine signals of consumer utility. Therefore, this undermines the fundamental assumption of competitive market behaviour modelled on accurate, independently formed information.
The Cambridge Analytica incident brought this idea into the political arena, with approximately 87 million Facebook users having their data collected to create psychographic profiles in order to target them for election purposes, without their consent or knowledge. The economic parallel in targeted advertising occurs on a much larger scale and is subject to far less scrutiny than political advertising.
Attempts at Regulation and Shortcomings
Regulatory authorities have begun to address this issue, albeit slowly. The European Union's General Data Protection Regulation (GDPR), which went into effect in 2018, requires companies to gain consumer consent and provide consumers with access to their data, and had imposed in excess of €4.5 billion in fines by 2023. California passed the California Consumer Privacy Act (CCPA) in 2018, with enforcement beginning in 2020. However, regulatory enforcement is varied, and as a result of the growing complexity of the sharing and collecting of data, providing consumers with detailed disclosures through cookie consent banners does not close the knowledge gap. Furthermore, a study from the Norwegian Digital Services Act Coalition indicates that 95% of internet users accepted default cookie settings without reading them, which reinforces the idea that simply giving consumers access to information does not restore informational parity. Therefore, it is likely that structural remedies such as data portability requirements, algorithmic audits, or limits on the use of data by third parties, are more effective than mere transparency requirements.
