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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: (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.

Suggested Citation

  • Dirk Bergemann & Alessandro Bonatti & Nicholas Wu, 2023. "How Do Digital Advertising Auctions Impact Product Prices?," Papers 2304.08432, arXiv.org, revised Apr 2024.
    • Handle: RePEc:arx:papers:2304.08432
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    References listed on IDEAS

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    1. Heski Bar-Isaac & Sandro Shelegia, 2023. "Search, Showrooming, and Retailer Variety," Marketing Science, INFORMS, vol. 42(2), pages 251-270, March.
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    6. Yash Kanoria & Hamid Nazerzadeh, 2020. "Dynamic Reserve Prices for Repeated Auctions: Learning from Bids," Papers 2002.07331, arXiv.org.
    7. Bonatti, Alessandro & Bergemann, Dirk, 2022. "Data, Competition, and Digital Platforms," CEPR Discussion Papers 17544, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Bonatti, Alessandro & Bergemann, Dirk, 2022. "Data, Competition, and Digital Platforms," CEPR Discussion Papers 17544, C.E.P.R. Discussion Papers.
    2. Guy Aridor & Rafael Jiménez-Durán & Ro'ee Levy & Lena Song, 2024. "The Economics of Social Media," CESifo Working Paper Series 10934, CESifo.

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