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How Do Digital Advertising Auctions Impact Product Prices?

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  • Dirk Bergemann
  • Alessandro Bonatti
  • Nicholas Wu

Abstract

We present 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) the allocation of advertisements follows an auction-like mechanism. We contrast data-augmented auctions, which leverage the platform’s data advantage to improve match quality, with managed-campaign mechanisms that automate match formation and price-setting. The platform-optimal mechanism is a managed campaign that conditions the on-platform prices for sponsored products on the off-platform prices set by all advertisers. This mechanism yields the efficient on-platform allocation but inefficiently high off-platform product prices. It attains the vertical integration profit for the platform and the advertisers, and it increases off-platform product prices while decreasing consumer surplus, relative to data-augmented auctions.

Suggested Citation

  • Dirk Bergemann & Alessandro Bonatti & Nicholas Wu, 2025. "How Do Digital Advertising Auctions Impact Product Prices?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(4), pages 2330-2358.
    • Handle: RePEc:oup:restud:v:92:y:2025:i:4:p:2330-2358.
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    File URL: http://hdl.handle.net/10.1093/restud/rdae087
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