How Digital Advertising Auctions and Managed Campaigns Impact Product Prices and Consumer Welfare

Główne pojęcia

Digital advertising platforms can leverage their data advantage to improve advertiser-consumer matching, but this can lead to higher off-platform product prices and lower consumer surplus compared to data-augmented auctions.

Streszczenie

The paper presents a model of digital advertising with three key features: (1) advertisers can reach consumers on and off a platform, (2) additional data enhances the value of advertiser-consumer matches, and (3) bidding follows auction-like mechanisms or managed campaigns.
The authors contrast two main mechanisms for allocating advertising space on the platform: data-augmented auctions and managed campaigns.
In data-augmented auctions, the platform provides advertisers with information about consumer characteristics, enabling them to make personalized price offers on the platform. This leads to an efficient on-platform allocation, but advertisers raise their off-platform prices to gain a competitive edge, resulting in higher off-platform prices and lower consumer surplus.
In the optimal managed campaign mechanism, the platform proposes a steering policy to match consumers with firms and a pricing policy for the sponsored offers. 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 increases off-platform product prices and decreases consumer surplus, relative to data-augmented auctions.
The authors also analyze two policy interventions: (1) restricting the platform's ability to condition pricing and steering on off-platform prices, and (2) limiting the platform's ability to perfectly price discriminate using consumer data. These interventions can reduce off-platform prices and benefit consumers, but may also reduce total surplus on the platform.

Statystyki

"Nearly 60% of the worldwide digital advertising revenue (which exceeds $600 billion) accrued on the platforms' own websites."
"Over 80% of digital advertising is now generated by managed campaigns."
"40-50% of Google's 2019 search advertising revenue in the UK came from advertisers using automated bidding."
"90-100% of UK advertisers on Facebook were using the default auto-bidding feature."

Cytaty

"Where an advertising platform has market power [...] advertiser bids in its auctions are higher, resulting in higher prices. In addition, the platforms may be able to use levers including the use of reserve prices or mechanisms such as automated bidding to extract more rent from advertisers."
"Higher advertising prices matter because they represent increased costs to the firms producing goods and services which are purchased by consumers. We would expect these costs to be passed through to consumers in terms of higher prices for goods and services, even if the downstream market is highly competitive."

Kluczowe wnioski z

How Do Digital Advertising Auctions Impact Product Prices?

by Dirk Bergema... o arxiv.org 04-25-2024

https://arxiv.org/pdf/2304.08432.pdf

Głębsze pytania

How would the results change if advertisers had the ability to offer multiple products or product lines on the platform?

In the model presented, each firm is assumed to offer a single product with fixed characteristics. If advertisers had the ability to offer multiple products or product lines on the platform, it would introduce additional complexity to the advertising dynamics. Here are some potential changes in the results:

Increased Competition: With multiple products or product lines, advertisers would have more options to target different consumer segments. This could lead to increased competition among advertisers on the platform.

Diversification of Offerings: Advertisers could tailor their advertising strategies to different products, potentially reaching a wider range of consumers. This could impact the equilibrium pricing strategies and consumer choices.

Optimization Challenges: Managing multiple products or product lines in advertising campaigns would require sophisticated optimization algorithms. The platform would need to adapt its mechanisms to accommodate these complexities.

Impact on Consumer Behavior: The availability of multiple products could influence consumer decision-making and purchasing behavior. Consumers may be presented with a wider array of choices, affecting their preferences and willingness to pay.

Revenue Generation: Advertisers offering multiple products may have different revenue streams and profit margins. This could influence their bidding strategies and pricing decisions on the platform.

Overall, the introduction of multiple products or product lines by advertisers would likely lead to a more intricate advertising ecosystem with implications for competition, consumer behavior, and revenue generation.

What are the potential anti-competitive effects of platforms using sophisticated algorithms to steer consumers and set personalized prices?

The use of sophisticated algorithms by platforms to steer consumers and set personalized prices can have several potential anti-competitive effects:

Market Manipulation: Platforms with significant market power can use algorithms to manipulate consumer choices and favor certain advertisers over others. This can lead to unfair competition and hinder market entry for smaller players.

Price Discrimination: Personalized pricing algorithms can result in price discrimination, where different consumers are charged different prices for the same product. This can distort competition and harm consumer welfare.

Reduced Transparency: Sophisticated algorithms may operate in opaque ways, making it difficult for regulators and competitors to understand how prices are set and how consumers are targeted. This lack of transparency can create barriers to competition.

Consumer Exploitation: By leveraging consumer data and behavioral insights, platforms can exploit consumer vulnerabilities and push them towards certain products or services. This can harm consumer autonomy and choice.

Market Segmentation: Algorithms that segment consumers based on their preferences and behaviors can lead to market segmentation, where certain groups of consumers are targeted more aggressively than others. This can create unequal market access and opportunities.

Overall, the use of sophisticated algorithms in steering consumers and setting personalized prices can amplify existing anti-competitive behaviors and raise concerns about market fairness and consumer protection.

How might the rise of decentralized technologies, such as blockchain-based advertising platforms, impact the dynamics between platforms, advertisers, and consumers?

The rise of decentralized technologies, particularly blockchain-based advertising platforms, could have several impacts on the dynamics between platforms, advertisers, and consumers:

Transparency and Trust: Blockchain technology enables transparent and immutable record-keeping, which can enhance trust between platforms, advertisers, and consumers. Advertisers can verify the authenticity of ad placements, and consumers can trust the accuracy of data used for targeting.

Data Privacy: Blockchain platforms can offer enhanced data privacy and security, allowing consumers to have more control over their personal information. Advertisers can access verified data without compromising user privacy.

Direct Transactions: Blockchain enables peer-to-peer transactions without the need for intermediaries. Advertisers can directly engage with consumers, reducing costs and increasing efficiency in the advertising process.

Smart Contracts: Smart contracts on blockchain platforms can automate advertising agreements, ensuring that all parties adhere to predefined rules. This can streamline the advertising process and reduce disputes.

Tokenization and Rewards: Blockchain platforms can introduce tokenization and reward mechanisms for consumer engagement with ads. Consumers can be incentivized to interact with ads, leading to more meaningful engagements.

Decentralized Governance: Blockchain-based platforms often operate on decentralized governance models, allowing stakeholders to have a say in platform decisions. This can democratize the advertising ecosystem and promote fairness.

Overall, the adoption of decentralized technologies like blockchain in advertising can revolutionize the industry by promoting transparency, data privacy, efficiency, and direct interactions between platforms, advertisers, and consumers.