The question is what do online advertisers get for their money? No doubt, user profiling helps advertisers more effectively identify the customers most likely to be interested in their products. However, the darker explanation is that such profiling also facilitates tailoring prices to individual consumers in ways that maximize revenue extracted from each transaction.
This ability to charge different prices to different customers for the same good or service, what economists call “price discrimination”, is based on the reality that people have different maximum prices they are willing to pay. And profiling consumers helps advertisers identify this “pain point” for each customer and offer a different price to each customer matching that maximum price they are willing to pay without them knowing that other deals are available.[i] Some economists argue that where consumers know all pricing options, they can potentially benefit from price discrimination, as when airline passengers choose between a cheap price at an inconvenient time to save money, which can fill seats, increase revenues for airlines and increase options for different customers.[ii] But when people either don’t know about better deals or don’t easily have the ability to access them, such price discrimination is far more likely to hurt consumers.