Information oils the economy – as we know since the path-breaking research of George Akerlof, Michael Spence and Joseph Stiglitz in the 1970s – and information can be extracted from data. Today, increased availability of “big” data creates the opportunity to access ever more information – for the good of the economy, then.
But in practice, how do companies extract value from this increasingly available information? In a nutshell, there are three ways in which they can do so: matching, targeted advertising, and market segmentation.
Matching is the key business idea of many recently-created companies and start-ups, and consists in helping potential parties to a transaction to find each other: driver and passenger (Uber), host and guest (Airbnb), buyer and seller (eBay), and so on. It is by processing users’ data with suitable algorithms that matching can be done, and the more detailed are the data, the more satisfactory the matching. Firms’ business model is usually based on taking a fee for each successful transaction (each realized match).
Targeted advertising is the practice of selecting, for each user, only the ads that correspond at best to their tastes or practices. Publicizing diapers to the general population will be largely ineffective as many people do not have young children; but targeting only those with young children is likely to produce better results. Here, the function of data is to help decide what to advertise to whom; useful data are people’s socio-demographic situation (age, marriage, children…), their current or past practices (if you bought diapers last week, you might do that again next week), and any declared tastes (for example as a post on Facebook or Twitter). How this produces a gain is obvious: if targeted adverts are more effective, sales will go up.