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Mr. Chunghan Kang
Ph.D. Candidate in Information Technology Management
Scheller College of Business
Georgia Institute of Technology

The prevalent ad-supported revenue model enables mobile apps to be offered to consumers for free, in which app developers work with ad networks that facilitate the delivery of relevant ads to app users. Precise targeting increases the willingness-to-pay of advertisers but also raises privacy concerns among consumers. Under the general trend where consumers become increasingly sensitive to privacy concerns, can the adsupported free revenue model continue to prevail? We develop a game-theoretic model involving three-stage decision making among an ad network, an app developer, and consumers. The ad network decides the optimal levels of targeting precision and revenue sharing; the app developer responds by choosing its optimal revenue model; and consumers with heterogenous privacy sensitivity make their choices. We find that as more consumers become privacy sensitive, surprisingly, the ad-supported free revenue model prevails in equilibrium. Interestingly, we identify the existence of economic rents for the app developer when the proportion of highly privacy-sensitive consumers reaches a certain threshold. Consumer surplus is also maximized at this threshold. Our findings suggest the unique strategic interplay structure in mobile advertising networks presents a market mechanism for the ad-supported free revenue model to prevail as more consumers become privacy sensitive without the need of external policy intervention. Yet, excess presence of highly sensitive consumers is not beneficial for consumers, the app developer, or the ad network. There appears to be a sweet spot of the distribution of consumer privacy sensitivity which various stakeholders can aim to achieve.