Digital Advertising and Market Structure: Implications for Privacy Regulation

Digital advertising, which uses consumer data to target ads to users, now accounts for most of global ad expenditures. Privacy concerns have prompted regulations that restrict the use of personal data. To inform these policy debates, we develop an equilibrium model of advertising and market structure to analyze the impact of privacy regulation on market outcomes. We test the model’s predictions using the launch of Apple’s App Tracking Transparency feature, which created a natural experiment that limited the use of consumer data. Leveraging data from all U.S. advertisers on Meta combined with offline administrative data, we find that reductions in digital ad effectiveness led to decreases in investments in advertising, increases in market concentration, and increases in product prices. These effects are economically meaningful in magnitude and suggest potential harms to both firms and consumers from privacy regulation.