Targeted advertising in digital media markets
Abstract: Digital platforms increasingly adopt advanced advertising technologies such as targeting. In this paper, we analyze the impact of targeting on competition and outcomes in two-sided markets. We concentrate on platforms that are financed by both advertising fees and subscription fees, and let them adopt a targeting technology with increasing performance in audience size: a larger audience generates more consumer data, which improves the platforms' targeting ability and allows them to extract more ad revenues. Targeting therefore increases the importance of attracting consumers. This could result in fierce price competition if consumers subscribe to only one platform. As a consequence, the platforms might end up competing away the additional ad revenues on the consumer side of the market. The platforms could, however, be better off by serving some consumers who also subscribe to rival platforms. This would soften the price competition and enhance the prospect of profitable targeting. We show that the platforms always benefit from targeting if shared consumers are sufficiently valuable in the ad market.