How Do Digital Advertising Auctions Impact Product Prices?

Dirk Bergemann; Alessandro Bonatti; Nicholas Wu

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arXiv · 2304.08432

How Do Digital Advertising Auctions Impact Product Prices?

Dirk Bergemann·Alessandro Bonatti·Nicholas Wu

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Abstract

We present a model of digital advertising with three key features: (i) advertisers can reach consumers on and off a platform, (ii) additional data enhances the value of advertiser-consumer matches, and (iii) bidding follows auction-like mechanisms. We contrast data-augmented auctions, which leverage the platform's data advantage to improve match quality, and managed campaign mechanisms that automate match formation and price-setting. The platform-optimal mechanism is a managed campaign that conditions on-platform prices for sponsored products on the off-platform prices set by all advertisers. This mechanism yields the efficient on-platform allocation but inefficient off-platform allocations due to high product prices; it attains the vertical integration profit for the platform and advertisers; and it increases off-platform product prices and decreases consumer surplus, relative to data-augmented auctions.

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Dirk Bergemann, Alessandro Bonatti, Nicholas Wu. 2024-04-23. How Do Digital Advertising Auctions Impact Product Prices?. https://arxiv.org/abs/2304.08432

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