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Digital Media Mergers: Theory and Application to Facebook-Instagram

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  • Justin Katz
  • Hunt Allcott

Abstract

We present a new model of competition between digital media platforms with targeted advertising. The model adds new insights around how user heterogeneity and overlap, along with user and advertiser substitution patterns, determine equilibrium ad load. We apply the model to evaluate the proposed separation of Facebook and Instagram. We estimate structural parameters using evidence on diminishing returns to advertising from a new randomized experiment and information on user overlap, diversion ratios, and price elasticity from earlier experiments. In counterfactual simulations, a Facebook-Instagram separation increases ad loads, transferring surplus from platforms and users to advertisers, with limited total surplus effects.

Suggested Citation

  • Justin Katz & Hunt Allcott, 2025. "Digital Media Mergers: Theory and Application to Facebook-Instagram," NBER Working Papers 34028, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34028
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    Cited by:

    1. Leonardo Bursztyn & Matthew Gentzkow & Rafael Jiménez-Durán & Aaron Leonard & Filip Milojević & Christopher Roth, 2025. "Measuring Markets for Network Goods," ECONtribute Discussion Papers Series 363, University of Bonn and University of Cologne, Germany.
    2. Aristotelis Epanomeritakis & Davide Viviano, 2025. "Learning What to Learn: Experimental Design when Combining Experimental with Observational Evidence," Papers 2510.23434, arXiv.org, revised Dec 2025.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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