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The Impact of the Internet on Advertising Markets for News Media

  • Susan Athey
  • Emilio Calvano
  • Joshua Gans

In this paper, we explore the hypothesis that an important force behind the collapse in advertising revenue experienced by newspapers over the past decade is the greater consumer switching facilitated by online consumption of news. We introduce a model of the market for advertising on news media outlets whereby news outlets are modeled as competing two-sided platforms bringing together heterogeneous, partially multi-homing consumers with advertisers with heterogeneous valuations for reaching consumers. A key feature of our model is that the multi-homing behavior of the advertisers is determined endogenously. The presence of switching consumers means that, in the absence of perfect technologies for tracking the ads seen by consumers, advertisers purchase wasted impressions: they reach the same consumer too many times. This has subtle effects on the equilibrium outcomes in the advertising market. One consequence is that multi-homing on the part of advertisers is heterogeneous: high-value advertisers multi-home, while low- value advertisers single-home. We characterize the impact of greater consumer switching on outlet profits as well as the impact of technologies that track consumers both within and across outlets on those profits. Somewhat surprisingly, superior tracking technologies may not always increase outlet profits, even when they increase efficiency. In extensions to the baseline model, we show that when outlets that show few or ineffective ads (e.g. blogs) attract readers from traditional outlets, the losses are at least partially offset by an increase in ad prices. Introducing a paywall does not just diminish readership, but it furthermore reduce advertising prices (and leads to increases in advertising prices on competing outlets).

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19419.

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Date of creation: Sep 2013
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Handle: RePEc:nbr:nberwo:19419
Note: IO PR
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  1. Randall Lewis & Justin M. Rao & David H. Reiley, 2013. "Measuring the Effects of Advertising: The Digital Frontier," NBER Working Papers 19520, National Bureau of Economic Research, Inc.
  2. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  3. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
  4. Attila Ambrus & Emilio Calvano & Markus Reisinger, 2014. "Either or Both Competition: A "Two-sided" Theory of Advertising with Overlapping Viewerships," CSEF Working Papers 378, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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  8. Susan Athey & Emilio Calvano & Joshua Gans, 2013. "The Impact of the Internet on Advertising Markets for News Media," NBER Working Papers 19419, National Bureau of Economic Research, Inc.
  9. GABSZEWICZ, Jean & WAUTHY, Xavier, 2004. "Two-sided markets and price competition with multi-homing," CORE Discussion Papers 2004030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer, vol. 32(2), pages 353-380, August.
  11. Matthew Gentzkow & Jesse M. Shapiro, 2011. "Ideological Segregation Online and Offline," The Quarterly Journal of Economics, Oxford University Press, vol. 126(4), pages 1799-1839.
  12. Simon P. Anderson & Stephen Coate, 2003. "Market Provision of Broadcasting: A Welfare Analysis," Virginia Economics Online Papers 358, University of Virginia, Department of Economics.
  13. Franklin M. Fisher & John J. McGowan & David S. Evans, 1980. "The Audience-Revenue Relationship for Local Television Stations," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 694-708, Autumn.
  14. Matthew Gentzkow, 2007. "Valuing New Goods in a Model with Complementarity: Online Newspapers," American Economic Review, American Economic Association, vol. 97(3), pages 713-744, June.
  15. David S. Evans, 2009. "The Online Advertising Industry: Economics, Evolution, and Privacy," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 37-60, Summer.
  16. Brown, Keith & Alexander, Peter J., 2005. "Market structure, viewer welfare, and advertising rates in local broadcast television markets," Economics Letters, Elsevier, vol. 86(3), pages 331-337, March.
  17. Dirk Bergemann & Alessandro Bonatti, 2011. "Targeting in advertising markets: implications for offline versus online media," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 417-443, 09.
  18. Jonathan Levin & Paul Milgrom, 2010. "Online Advertising: Heterogeneity and Conflation in Market Design," American Economic Review, American Economic Association, vol. 100(2), pages 603-07, May.
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