Commercial software, adware, and consumer privacy

•I study the choice between selling new software commercially and bundling it with ads.•Adware allows advertisers to send targeted information to specific consumers.•Targeted ads improve the consumers' purchasing decisions, but it also entails a loss of privacy.•Adware is more profitable when the software's quality is low.•I also study the effect of the choice between commercial software and adware on consumers' welfare.

I study the choice between selling new software commercially and bundling it with ads and distributing it for free as adware. Adware allows advertisers to send targeted information to consumers which improves their purchasing decisions, but also entails a loss of privacy. I show that adware is more profitable when the perceived quality of the software is relatively low, when tracking technology improves, when consumers benefit more from information on consumer products and are less likely to receive it from external sources. I also show that improvements in the technology of display ads will lead to less violation of privacy and will benefit consumers, that depending on the software's quality, there are either too many or too few display ads in equilibrium, and that from a social perspective, adware dominates commercial software.