Working Paper: CEPR ID: DP18346
Authors: Dirk Bergemann; Alessandro Bonatti; Nick Wu
Abstract: We ask how the advertising mechanisms of digital platforms impact product prices. We present a model that integrates three fundamental features of digital advertising markets: (i) advertisers can reach customers on and off-platform, (ii) additional data enhances the value of matching advertisers and consumers, and (iii) bidding follows auction-like mechanisms. We compare data-augmented auctions, which leverage the platform's data advantage to improve match quality, with managed campaign mechanisms, where advertisers' budgets are transformed into personalized matches and prices through auto-bidding algorithms.In data-augmented second-price auctions, advertisers increase off-platform product prices to boost their competitiveness on-platform. This leads to socially efficient allocations on-platform, but inefficient allocations off-platform due to high product prices. The platform-optimal mechanism is a sophisticated managed campaign that conditions on-platform prices for sponsored products on off-platform prices set by all advertisers. Relative to auctions, the optimal managed campaign raises off-platform product prices and further reduces consumer surplus.
Keywords: data; advertising; competition; digital platforms; auctions; automated bidding; managed advertising campaigns; matching; price discrimination
JEL Codes: D44; D82; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| advertisers increase off-platform product prices (D49) | socially efficient allocations on-platform (D61) |
| advertisers increase off-platform product prices (D49) | inefficient allocations off-platform (D61) |
| higher off-platform prices (P22) | socially efficient allocations on-platform (D61) |
| higher off-platform prices (P22) | inefficient allocations off-platform (D61) |
| data-augmented bidding (D44) | enhances matching efficiency (C78) |
| managed campaign (M38) | raises off-platform product prices (D49) |
| higher costs of online advertising (L81) | increased product prices off-platform (D49) |