The Impact of the Internet on Advertising Markets for News Media

Transcription

1 The Impact of the Internet on Advertng Market for New Meda by Suan Athey, Emlo Calvano and Johua S. Gan * Frt Draft: October, 009 Th Veron: October 0 In th paper, we explore the hypothe that an mportant force behnd the collape n advertng revenue experenced by newpaper n the pat decade the greater conumer wtchng facltated by onlne conumpton of new. We ntroduce a model of the market for advertng on new meda outlet whereby new outlet are modeled a competng two-ded platform brngng together heterogeneou, partally mult-homng conumer wth adverter wth heterogeneou valuaton for reachng conumer. A key feature of our model that the mult-homng behavor of the adverter determned endogenouly. The preence of wtchng conumer mean that, n the abence of perfect technologe for trackng the ad een by conumer, adverter purchae wated mpreon: they reach the ame conumer too many tme. Th ha ubtle effect on the equlbrum outcome n the advertng market. One conequence that mult-homng on the part of adverter heterogeneou: hgh-value adverter mult-home, whle low-value adverter ngle-home. We characterze the mpact of greater conumer wtchng on outlet proft a well a the mpact of technologe that track conumer both wthn and acro outlet on thoe proft. Somewhat urprngly, uperor trackng technologe may not alway ncreae outlet proft, even when they ncreae effcency. In extenon to the baelne model, we how that when outlet (e.g. blog) that how few or neffectve ad attract reader from tradtonal outlet, the loe are at leat partally offet by an ncreae n ad prce. Introducng a paywall doe not jut dmnh readerhp, but t furthermore reduce advertng prce (and lead to ncreae n advertng prce on competng outlet). * Harvard (Athey), Boccon (Calvano), Unverty of Toronto (Gan). Th paper wa prevouly crculated wth the ttle Wll the Internet Detroy the New Meda? We thank partcpant at the ZEW Platform Conference (Mannhem), Touloue Network Conference (Seattle), 00 Meda Economc Workhop (CUNY), Annual IO Theory Workhop (Duke), Conference on Internet and Software (Touloue), 00 Economc of Informaton and Communcaton Technologe (Par), 0 Internatonal Indutral Organzaton Conference (Boton), 0 CRES Conference (St Lou), 0 NBER Summer Inttute (Dgtzaton) and at emnar at Dartmouth, Harvard, Yale, Vrgna, Toronto, Chcago, Columba, George Maon, London School of Economc, Boton College, Google, Mcrooft Reearch, Harvard Bune School, CSEF n Naple, Autonoma, Bologna, Ca Focar, MIT and Berkeley for helpful comment. Specal thank to Mchael Rordan, Hanna Halaburda and Francco Ruz-Aleda for helpful dcuon. We thank Jng Xa for outtandng reearch atance. Fnancal upport from the Touloue Network on Informaton Technology gratefully acknowledged. Reponblty for all vew expreed le wth the author and not wth any afflated organzaton. The latet veron of th paper avalable at reearch.johuagan.com.

2 Introducton The ue of whether the Internet wll detroy the new meda currently a bg new topc. The new ndutry a a whole ha een large declne n advertng revenue, whle tradtonal meda ha multaneouly faced ncreaed competton for attenton from new meda (ncludng web-only new, blog and new aggregator). Polcy-maker have expreed concern that declnng revenue per conumer a well a fragmentaton n the meda mght undermne ncentve to nvet n qualty journalm. Whle new technologe and competton can often explan why revenue may be redtrbuted among ndutry player, the advere mpact of the Internet on the new meda wdepread: ndutry-wde revenue ha declned. Th repreent an economc puzzle becaue, n many repect, the fundamental drver of upply and demand appear to be a favorable for the ndutry f not more favorable than before. We argue that th true depte aerton to the contrary n the popular pre that advertng revenue are beng detroyed by the Internet becaue of the flood of avalable advertng pace. From the New York Tme, onlne ad ell at rate that are a fracton of thoe for prnt, for mple reaon of competton. In a prnt world you had pretty much a lmted amount of nventory page n a magazne, ay Domenc Venuto, managng drector of the onlne marketng frm Razorfh. In the onlne world, nventory ha become nfnte. (Rce, 00) Whle there may be pace for every adverter on the Internet, thoe ad mut tll be vewed by an actual conumer. The attenton of thoe conumer tll lmted, and carcty lmt the Accordng to the Newpaper Aocaton of Amerca ( nce 000 total advertng revenue earned by t member US newpaper declned by 57% n real term to be around $7 bllon n 009. Much of th declne wa n revenue from clafed but total dplay advertng revenue fell around 40%. In contrat, crculaton over the ame perod declned by 8%. Ad revenue a a hare of GDP alo declned by 60%. Accordng to ComScore, total US dplay advertng revenue onlne wa around $0 bllon n 00 whch nclude all te and not jut newpaper.

3 avalable advertng capacty. Snce adverter compete for carce conumer attenton, t unlkely that the prce of ad wll go to zero. It ha been oberved that nternet-provded ervce (uch a clafed ad and move ltng) have dplaced revenue tream from ervce that prevouly were provded by newpaper. However, the declne n advertng revenue much larger than the lo due to clafed. Another change brought on by the Internet that could be condered a a problem for newpaper advertng revenue that the Internet had created new type of advertng opportunte (e.g., nternet earch ad). However, oberver and regulator have noted that thee new form of advertng are complement rather than ubttute for the knd of advertng typcally ued by the new meda. 3 On the potve de of the equaton, the Internet ha enabled mproved meaurement of advertng performance and created new opportunte to mprove the targetng of advertng to conumer (Evan, 009). 4 Another change n fundamental that the delvery of content and advertng ha become le cotly. Although cot reducton are favorable for a fxed ndutry tructure, they may lead to entry. However, a we explan below, the benchmark model of meda economc predct that advertng prce hould not fall n repone to entry. The benchmark model of meda economc (e.g., Anderon and Coate, 005) have meda outlet competng for conumer by howng fewer ad (a force that wll not be the focu of our analy). Conumer are aumed to ngle-home (vew jut one outlet n a relevant tme perod), and o once an outlet ha attracted conumer, t act a a monopolt on the advertng Accordng to the Newpaper Aocaton of Amerca ( nce 000, newpaper dplay advertng revenue ndependent of clafed ad, ha declned almot 40 percent n real term. 3 Evan (008, 009). 4 Some hypotheze that onlne or dgtal ad are far le effectve than ad that are on paper. However, to date, the evdence not content wth that hypothe (ee Dreze and Huherr, 003; Lew and Reley, 009; Goldfarb and Tucker, 00).

4 3 de of the market when ellng adverter acce to thoe conumer. Thu, advertng revenue reflect monopoly prce, ndependent of the number of outlet. Indeed, competton amongt meda outlet n th model would lead to hgher ad prce, a thoe outlet cale back level of annoyng advertng a they compete to attract conumer. In contrat to the predcton of the model, however, there evdence that competton aocated wth fallng ad prce ncludng merger that ncreae them (Anderon, Foro and Knd, 00). Another predcton of the benchmark model that ad revenue per conumer hould equalze acro outlet (that, attenton worth the ame regardle of where t allocated); n contrat, there evdence that larger outlet command a premum. 5 Fnally, rather than welcome polcy move to requre publc broadcater to rae revenue from ad rather than be ubdzed, extng meda outlet have typcally oppoed the lftng of advertng retrcton. 6 All of thee factor ugget that competton n advertng market not workng n the manner that tradtonal meda economc predct. Th paper preent a formal analy of the propect for advertng-funded content on the Internet. Our analy grounded by carefully accountng for the fundamental of upply and demand: our model et-up (n Secton ) hold fxed the total upply of conumer attenton a well a the contant demand from adverter for that attenton. We then derve advertng revenue from a market equlbrum. We demontrate that there are two model element mperfect conumer trackng and ncreaed conumer wtchng that can together lead to outcome that match the tylzed fact decrbed above. Frt, conder the problem of conumer wtchng. 5 Recently, th ha been referred to a the ITV Premum Puzzle (Competton Common, 003). However, the relatonhp ha been notced prevouly by Fher et.al. (980) and Chwe (988). 6 Ambru and Renger (006) document the oppoton of German broadcater to allowng publc televon broadcater to how advertement after 8pm.

5 4 Newpaper reader are better than Web vtor. Onlne reader are a notorouly fckle bunch, and apparently are gettng more o by the day. Web vtor barely tck around, yet they are counted n broad traffc tattc a f they were the ame a the reader who lnger over h Sunday paper. (Farh, 009) Th reflect the propoton that the web enable conumer to more readly wtch between outlet. In the offlne world, conumer of prnt and other meda would face ome contrant n acceng new and other content from multple ource. Th not to ay that conumer lterally allocated all of ther attenton to one outlet, but jut that ther ablty to wtch between outlet and bundle a varety of content wa lmted n comparon to ther opton today. Thu, whle conumer may have pent 5 mnute readng the mornng prnt newpaper, they may pend on average 90 econd on a new webte (Varan, 00). Th not a reducton n the amount of conumpton, but ntead a reducton n loyalty to any one outlet. Web brower make t eay for conumer to move between outlet whle free acce remove other contrant. But, gong beyond th, ntermedare uch a earch engne, aggregator and ocal network facltate wtchng. Indeed, we examned emprcally the new conumpton pattern of everal mllon nternet uer, and found that among uer who conumed at leat 0 new artcle per week, the concentraton of a uer conumpton among dfferent new outlet, a meaured by a new conumpton Herfndahl ndex, wa trongly and negatvely aocated wth the uer frequency of ung Google new and Bng new. 7 Second, conder the problem of mperfect trackng. We potulate that outlet have a uperor ablty to track the behavor of conumer wthn ther outlet rather than between them. 8 When conumer are each loyal to a ngle outlet, mperfect trackng would not be an ue for 7 See alo Chou and Tucker (00) for addtonal evdence that new aggregator facltate conumer wtchng between outlet. 8 Th content wth current practce (Edelman, 00).

6 5 adverter. To reach many conumer, adverter could purchae mpreon on a wde number of outlet (.e., mult-home) and acheve thoe goal. However, when conumer wtch between outlet, adverter have a harder tak. An adverter who mult-home wll fnd that t mpree the ame conumer more than once, potentally watng expenve advertng. 9 Maxmzng the reach of advertng now carre the addtonal cot of payng for wated mpreon. In contrat, an adverter who ngle-home wll m ome proporton of conumer entrely. We how that conumer wtchng and mperfect trackng together nteract to generate an outcome whereby an ncreae n conumer wtchng (holdng fxed the number of outlet and ther market hare) lead to a reducton n mpreon prce, a adverter are not wllng to pay a much due to the potental wate. For mlar reaon, ncreang the number of outlet alo reduce total advertng revenue. However, n the abence of wtchng, our model reduce to the tandard meda economc model, whereby outlet et monopoly prce to adverter rrepectve of the competton among outlet. Wth only a few excepton, the lterature on two-ded market aume that each de of the market ether fully ngle-home or fully mult-home. 0 Whle mot model n the meda economc lterature aume that conumer ngle-home that, chooe to allocate attenton to only one outlet there are ome that have condered what happen when conumer multhome. Gabzewcz and Wauthy (004) and Anderon and Coate (005) condered th but demontrated that adverter would all ngle-home n th cae reultng n no change n overall advertng revenue. Recently, Ambru and Renger (006) condered a model of 9 Some adverter target an optmal number of mpreon per conumer that greater than one. Imperfect trackng make t dffcult to target that optmal number of mpreon, however, for concretene n our model we tudy the cae where the optmal number of mpreon equal to one. 0 Although t ha receved le attenton n the economc lterature, fxed cot of engagng wth alternatve outlet are mportant n practce n the advertng ndutry. We do not conder uch fxed cot n th paper. Ahlag, Edelman & Lee (00) examne competng ad aucton for earch engne where conumer ngle-home but adverter face cot that make mult-homng cotly.

7 6 horzontally dfferentated outlet whereby only ome hare of conumer mult-homed; pecfcally, conumer who are on the margn of choong one outlet or the other. They then poted that thoe conumer were le valuable to outlet than conumer who ngle-homed. Anderon, Foyo and Knd (00) endogenzed the value of mult-homng conumer, and demontrated that outlet would receve lower prce for ad hown to mult-homng conumer than loyal one. Conequently, outlet adjut ther advertng level (creatng more annoyng ad) to reduce conumer mult-homng. The overall mpact on prce ambguou, but competton doe reduce outlet proft n ther model. A noted earler, we move away from the noton that conumer come to outlet wth an aocated revenue tream and ntead model revenue a arng from the effectve mpreon adverter are able to procure. Th nvolve contructng a model whereby conumer may wtch outlet wthn the tme perod adverter want to place mpreon n front of them. Importantly, th mean that an outlet can place more ad over loyal conumer (who conume more content on an outlet) than they can over wtchng conumer, who only vt the output for ome fracton of the relevant tme perod. Th requre u to conder the mxed ngle and mult-homng conumer outcome and to olve for the reultng equlbrum n the advertng market. 3 The modelng challenge are becaue the prce that clear the market alo mpact on the qualty of lkely matche between conumer and adverter (that, the lkelhood of a wated mpreon). We demontrate that a ortng equlbrum ext, whereby hgh value Both Ambru and Renger (006) and Anderon, Foyo and Knd (00) aume that the ad-capacty aocated wth ngle and mult-homng conumer are dentcal. A demontrated below, the fact that loyal (ngle-homng) conumer wll allocate more attenton to an outlet and hence, vew more ad, than wtchng (mult-homng) conumer ha a gnfcant mpact on the reultng equlbrum and the et of tratege outlet may purue to maxmze proft. 3 Th method of dealng wth two-ded market telf novel. Rather than the outlet (or platform) choong prce n a monopoltc or olgopoltc fahon (e.g.., ee the general reult of Weyl, 00), on the advertng de, revenue to outlet are determned by market clearng prce. Thu, we can analyze how technology and other factor mpact on the effcency of advertng market outcome and, n turn, how th mpact on outlet revenue.

8 7 adverter mult-home and, n ome cae, ncreae the frequency of mpreon o a not to m conumer, whle lower value adverter ngle-home. A the hare of wtchng conumer re, adverter prefer to ngle-home rather than mult-home. Th free up ad capacty on each outlet for lower valued adverter, who et the prce n the market. Conequently, prce and total ad revenue declne. Interetngly, we demontrate that th reult not traghtforward. It depend crtcally on the total avalable ad capacty. When capacty very hgh, whle ngle-homng adverter are alway the margnal adverter n the market, hgh value adverter have an ncentve to purchae multple mpreon and aborb nframargnal capacty. The balance between the margnal and nframargnal mean that, n ome cae, for fxed (and large) ad capacty, ncreaed conumer wtchng between outlet may be aocated wth hgher, not lower, outlet proft. Indeed, proft may exceed level that can be acheved when ether wtchng or mperfect trackng not a problem. 4 Our baelne model aumed that outlet were ymmetrc. We relax th and derve condton under whch outlet earn hgher advertng revenue per conumer than ther rval. Th happen when one outlet ha a lower ad capacty than the other, although t may not ncreae ther total proft. Sgnfcantly, an outlet wth a hgher readerhp can, n the face of 4 We note below that th reult rele on level of ad capacty on each outlet that are hgher than the equlbrum level that would be choen n a Cournot-lke ad capacty game. In th paper, we aume that ad capacty on each outlet fxed and exogenou. Th capture a world where outlet tck to a tandard format for where advertng appear on a new page, and do not vary t a conumer wtchng ncreae. Incorporatng endogenou ad capacty would potentally rae two effect. One effect the tandard Cournot effect: hgher advertng capacty lead to lower prce, and ncreaed competton among outlet lead to hgher equlbrum capacty. A econd effect the one dentfed n the pror lterature on meda economc: uer dlke ad, and o outlet compete for uer by provdng fewer ad. Mot of our reult are qualtatvely robut to ncorporatng Cournot-tyle competton n capacty; however, pecfc functonal form play a role n dervng comparatve tatc on the role of wtchng, for the uual reaon that capacte are trategc ubttute, whle exogenou parameter mght hft the return to capacty n mlar drecton for all outlet, leadng to competng effect n the equlbrum analy. Incorporatng the negatve effect of competton on ad capacty due to competton for uer would moderate ome of our fndng. Our choce to leave th out of the model reflect the dere to focu on the novel effect n our model, together wth our obervaton that, whle nternet advertng doe mpact the uer experence, the content of the te rather than the level of advertng the drvng force behnd onlne new meda market hare.

9 8 conumer wtchng, command a hgher mpreon prce than t rval. Th becaue the margnal adverter who a ngle-homer n that cae wll prefer to purchae mpreon on the outlet wth the hgher readerhp hare and wllng to pay a premum to do o. Conequently, hgher valued, ngle-homng adverter ort onto the hgh readerhp outlet frt, gvng them a potonal advantage. On the polcy-de, we demontrate that a reducton n competton (ay through a merger) alway reult n hgher ndutry ad revenue. Next, we conder everal applcaton of the model. We demontrate that when ome outlet cannot ell ad (a they mght f they are regulated publc broadcater or maller blog) ad prce wll be hgher. When outlet capture conumer attenton wthout ellng ad, th reduce the upply of capacty that can be old to adverter n the market. Further, becaue movement to and from uch outlet do not created wated mpreon, effcency and prce go up. Thu, our model provde a ratonalzaton of prvate meda outlet objecton agant publc broadcater beng allowed to ell ad. Fnally, we explore trategc mplcaton arng from our model. We demontrate that potonal advantage arng from outlet aymmetre n readerhp hare can drve competton for thoe conumer and, ndeed, may caue outlet to nvet more n qualty than they would under benchmark cae or perfect trackng. Th reult content wth the tylzed fact that meda outlet that provde greater reach command hgher ad prce, all ele equal. We alo demontrate that an outlet can gan a potonal advantage by havng lmted content, but content that conumer vt relably omethng we term magnet content. If outlet can enure that a hgh hare of conumer wll at ome pont allocate attenton to them, thoe outlet can command a premum n advertng market. Th ugget that outlet may focu ther effort on producng offerng that regularly attract the attenton of many conumer rather than the focued attenton

10 9 of fewer conumer. 5 Relatedly, we demontrate that paywall unlaterally mpoed by an outlet can have the effect of reducng ther potonal advantage or gvng ther rval a potonal advantage n advertng market. A a reult, we dentfy addtonal compettve cot to outlet from ntroducng paywall. Model Set-up We begn by ettng out the fundamental of conumer and adverter demand and behavor that drve our model. Thee are the core element that do not change a conumer face lower cot of wtchng between outlet. We then conder benchmark before turnng to the equlbrum outcome n the advertng market n the followng ecton.. Conumer Attenton and Adverter Value Conumer both allocate carce attenton to meda conumpton and are potental purchaer of product and can be matched wth frm through advertng. Conumer are aumed to purchae product at a lower rate than they conume meda; e.g., a conumer mght purchae one oda n a day but have numerou opportunte to conume meda over that ame perod of tme. A oda-maker concerned about puttng an mpreon n front of a conumer ometme durng the day and o ndfferent a to whch perod of the day that occur. Formally, uppoe there are T perod, where the defnng feature of a perod that a conumer can only read one unt of content per perod (o t would correpond to omethng lke a vew of an onlne web page). We let a be the exogenou ad capacty that outlet preent to conumer per unt of tme. 6 In each perod that a conumer vt outlet, a conumer 5 A countervelng effect outde our model that wth more data about conumer, outlet can ell more targeted advertng. See Athey and Gan (00) for an analy of the mpact of targetng technology on ad prce. 6 The robutne of our reult to th aumpton dcued below.

11 0 mpreed by a ad. Thu, Ta the total (maxmum poble) amount of advertng nventory ntroduced to the market by outlet and t acheved f a conumer vt that outlet for all T perod. 7 An adverter who put an mpreon n front of a conumer n a perod receve a value (trctly, the expected value of a lead), v [0, V]. 8 v the ame for all conumer and ndependent of the number of conumer recevng an mpreon. The value to the adverter doe not ncreae f the ame conumer ee more than one ad mpreon from a gven adverter. Adverter are heterogeneou n ther valuaton, and the cumulatve dtrbuton functon of adverter valuaton F(v). 9 If Ta the total upply of conumer attenton, and adverter are ranked by value n term of ratonng of acce to conumer attenton, then the margnal adverter, v, defned by F( v ) Ta. We retrct attenton, therefore, to cae where max a / T o there an nteror oluton.. Outlet Demand and Advertng Inventory How do conumer allocate attenton to dfferent meda outlet? We aume that whenever a conumer ha an opportunty to chooe, outlet choen wth probablty x. Thu, x a meaure of an outlet ntrnc qualty. 0 If a conumer chooe an outlet, {,..., I}, and ha no opportunty to wtch thereafter, outlet advertng nventory would be xat. 7 If adverter placed only a ngle ad on an outlet, Ta alo the maxmum quantty of adverter who could pobly reach an ndvdual conumer that tay wth outlet for all perod. 8 We aume that all advertng equally effectve regardle of the quantty, and we aume away conumer dutlty of ad (cf: Anderon and Coate, 005). 9 An alternatve pecfcaton mght have adverter derng to reach a pecfc number of conumer (Athey and Gan, 00) or a pecfc conumer type (Athey and Gan, 00; Bergemann and Bonatt, 00). 0 In our baelne model t exogenou, but n Secton 5. we endogenze the qualty

12 We aume, however, that an opportunty for a conumer to wtch outlet arrve (ndependently) each perod wth probablty,. For convenence, throughout th paper we aume that T = o, n effect, there, at mot, a ngle opportunty to wtch. Thu, the total expected amount of attenton gong to x x ( ) x ( x ) x x. We let l D x x ( x ) denote the hare of conumer loyal to (.e., ngle-homer) and D x x denote the hare conumer who wtch between outlet and j (.e., mult-homer) j j n any gven perod. When there are no wtchng opportunte (.e., 0 ), D l x and D 0 j for all {, j }. In th model, f outlet have aymmetrc capacty, then dfferent conumer wtchng type wll generate dfferent advertng capacte. Conumer loyal to an outlet wll generate a n advertng nventory whle a conumer wtchng between outlet and j wll generate a aj n advertng nventory..3 Benchmark Gven th et-up, t ueful to conder an effcent outcome for the allocaton of adverter to conumer. A frt-bet allocaton would enure that hghet value adverter are allocated wth prorty to carce advertng nventory. Let v denote the margnal adverter allocated to conumer loyal to outlet and let v, j denote the margnal adverter allocated to conumer who wtch between outlet and j. An effcent allocaton of adverter to conumer nvolve allocatng all adverter wth v v to outlet loyal conumer and thoe Here we treat th probablty a ndependent of htory (.e., outlet a conumer may have vted earler) or the future (.e., outlet that they may vt later). In Secton 5., below, we explore the mplcaton of relaxng th aumpton.

13 wth v v, j to thoe who wtch between and j. Thu, the margnal adverter wll be determned by: a F( v ) and a a j F( v, j ). To ee how th frt bet mght be mplemented, conder an ad platform wth a technology the element of whch currently ext (at leat onlne) but the mplementaton far from achevng t deal whereby conumer can be tracked both wthn and acro outlet wth nformaton kept a to the ad they have een. In th tuaton, a conumer could be mpreed by an ad at mot once and adverter could, wth certanty, pay for an mpreon to a conumer and receve t. We term th perfect ad-trackng, a the ad platform (or broker or exchange) able to track conumer acro web-te and control the ad they ee n a gven perod of tme. Suppoe that what th allowed wa for outlet to et prce pecfc to the type of conumer that vt them loyal or wtchng. That, the platform can prce dcrmnate baed on conumertype (the platform can do th, becaue t ee behavor of conumer on all outlet). We aume that the outlet have a ngle level of ad capacty for all conumer and ell thoe mpreon ung the ad platform. 3,4 Of coure, ome adverter may have an optmal number of mpreon per conumer other than one. The technology could enure that optmum o, wthout lo n generalty, we retrct that optmum to one here. 3 To ee how th would work, conder the allocaton and prcng problem faced by the ad platform. Conumer who end up loyal to the hghet-capacty outlet ee ad from the larget nterval of adverter, whle conumer who end up loyal to the lowet-capacty outlet ee ad from the mallet nterval of adverter, but allocatve effcency requre that all conumer ee ad from the hghet-value adverter. The challenge that before the reoluton of wtchng behavor, the total et of adverter a conumer hould ee and the market-clearng prce cannot be determned. In a table envronment, the ad platform can offer a et of prce for each type of conumer, uch that upply equal demand for each type. In the frt perod, the platform allocate the hghet-value adverter frt to each conumer (a revealed by ther wllngne to place an order for the mot expenve conumer type). Then n the econd perod, the ad platform know the total upply of ad pace for each conumer and allocate the remander of the adverter who place an order for thoe type of conumer. 4 An alternatve (but probably le realtc) aumpton would be that the ad platform hare nformaton wth the outlet about the conumer type, o that the outlet can et dfferent capacte for dfferent type. 4 Th addtonal flexblty would lead to a cenaro wth eentally dtnct market, o that frm compete for wtcher and but have a monopoly over acce to loyal uer. It a bt more complcated to thnk how th would work n practce, nce conumer type would only be fully determned n the econd perod, after the conumer had already experenced a frt-perod ad capacty. We omt the formal analy of th cae.

14 3 A conumer who loyal to outlet, wll generate a n advertng nventory. Adverter wll chooe to adverte to a conumer o long a ther value exceed the mpreon prce. Conequently, the prce per mpreon to a ngle-homer on outlet, p, wll be determned by - F( p ) = a or p = P(- a ) º F - (- a ). In contrat, a mult-homng conumer, wtchng between outlet and j, generate a aj unt of advertng nventory and o the prce per mpreon on them determned by - F(p j ) = a + a j. Note that th an effcent allocaton of adverter to conumer. Note alo that f a aj, then p p j pj whle f a a, then p pj p j. j In a gven perod, outlet receve all of t loyal conumer, l D, and half of the wtcher between t and a gven outlet j, D j. Gven th pecfcaton, the producer urplu attrbutable to outlet : P( a a ) a D P( a )a D. From th, t clear that outlet l j j j urplu mpacted upon by the type of conumer t attract only f t ad capacte dffer from other outlet. If a l a for all, then P ( a ) a D j D x P ( a ) a. Note that thee j proft do not depend on the hare of loyal and wtchng cutomer. 3 Market Equlbrum We now turn to conder the market equlbrum that are when trackng not perfect. We focu here on the cae where there are two outlet, and ; conequently we let D D. Frt, we dcu what properte mperfect trackng technologe have before turnng to the mpact of conumer wtchng on the advertng market equlbrum.

15 4 3. Trackng technologe Above we condered a certan offer that mght be put to adverter when there wa perfect trackng: over the two attenton perod, we wll mpre a gven et of conumer jut once regardle of where ther attenton allocated at a prce of p per conumer/mpreon. Th offer wa made by an ad platform and wa outlet ndependent. At the other extreme what we could term no trackng. Th are when nether outlet nor a common platform are unable to nternally (or externally) track mpreon and to control matchng between adverter and conumer. In the early day of the Internet (crca 000), webte had no ablty to track conumer even wthn outlet, and even today wth prvacy ettng uch trackng may not be poble. The model of Butter (977) and, more recently, Bergemann and Bonatt (0) aume that adverter chooe the ntenty of ther advertng on an outlet, but that advertng meage (mpreon) are dtrbuted ndependently (acro meage) and unformly acro conumer. Th mean that a gven conumer mght ee the ame advertement multple tme, whch nvolve wate and offer to adverter would be of the form: over the two attenton perod, we wll place a gven number of mpreon on our outlet for a prce of p per mpreon. 5 We focu here on a more realtc ntermedate tuaton where outlet can track mpreon nternally but not externally. Thu, outlet cannot offer nter-outlet arrangement (uch a dfferent prce for dfferent wtchng categore of conumer) that would be poble under perfect trackng becaue they cannot track conumer acro outlet. 5 In uch model, the expected number of unque mpreon receved by an adverter wth advertng ntenty n n a market of ze x gven by x - (- x )n elected for a gven ad mpreon. ( )» x(- e - n/x ), where x the probablty that a gven conumer

16 5 There are many poblte when one conder mperfect trackng that treat nternal and external trackng aymmetrcally. For ntance, one could mage a technology that provded perfect nternal trackng, whereby no conumer receve more than one mpreon from an adverter on a gven outlet. In th tuaton, one poble offer an outlet mght make over the two attenton perod, we wll mpre each unque conumer on the outlet once at a prce of p per mpreon/conumer. Thu, an adverter could accept th deal and purchae mpreon on D l D conumer on outlet. However, th create a capacty management ue f the outlet cannot dtnguh loyal from wtchng conumer. If an outlet doe not mpre all conumer n the frt perod t wll have to mpre them n the econd perod. However, unle t can dtnguh between loyal and wtcher n the frt perod, ome conumer may move to the other outlet and t wll be unable to fulfll t contract. Alternatvely, t could mpre all conumer n the frt perod and perhap dentfy the new wtcher a unque conumer to mpre n the econd perod. But, even n that cae, loyal, who reman through the econd perod, wll have addtonal capacty that can be old. In prncple, that capacty could be old under a mpre all unque conumer contract but th would mean that the outlet would have to offer a range of dtnct product to adverter. Th an nteretng and potentally realtc cenaro, however, due to t addtonal complexty we do not explore that here and leave the analy to Secton 5 below. Intead, we conder here trackng technologe where outlet offer a ngle product or contract type to adverter. One poble contract offer mght be we wll aocate an ad wth a gven pece of content and you wll pay a prce of p each tme that ad vewed. Th effectvely the offer made for offlne content and, o long a conumer read a pece of content at mot once, t ha a natural form of trackng embedded wthn t. If an adverter purchaed ad

17 6 l alongde a ngle pece of content on a ngle outlet they would expect to mpre D D cutomer. If they purchaed an ad alongde content on both outlet they would expect to l l 3 mpre D D D unque cutomer. Note that an adverter, placng ad on both outlet, 4 would be able to mpre all loyal conumer but may m ome wtchng conumer whle mpreng other conumer more than once. The more wtcher an adverter would want to target, the more pece of content they would have to place ad alongde. Thu, they would be payng for multple mpreon on loyal conumer that, under our aumpton, would not generate addtonal value for them. The noton that to mpre more wtcher, adverter need to pay for more wated mpreon a common feature of mperfect trackng. If an adverter pay for n content-baed ad, t wll mpre ( ) D wtcher. That ad, the wate nvolved lmted f adverter ngle-home and confne ther ad to one outlet. An alternatve offer, avalable to onlne outlet, would be: over the two attenton perod, we wll place at mot x mpreon per conumer at a prce of p per mpreon. For ntance, f an adverter choe a rate of at mot one mpreon per conumer over the two perod, the outlet could how an ad to all conumer n the frt or to all conumer n the econd l perod for a total of D D mpreon. If the adverter choe a rate of two mpreon, the outlet would mpre all conumer n each perod reultng n D l D mpreon. Of coure, lke ad aocated wth content, f an adverter were to accept th contract on both outlet l l 3 ay, at a rate of one ad each, t would mpre D D D conumer wth a total of n 4 D D D mpreon. There would be med wtcher a they moved between outlet and l l for the ame reaon ome wated mpreon on wtcher. If the adverter ncreaed the ad rate to two on jut one of the outlet, ay outlet, t would mpre all conumer but pay for

18 7 3 D l D l D mpreon. Table lt the expected adverter urplu aocated wth varou advertng purchae, ( n, n ) where n the number of mpreon purchaed per cutomer on outlet over the two attenton perod. For mplcty, we have aumed that D D D and that the mpreon prce, p, the ame acro both outlet. l l l Adverter Choce Table Expected Number Expected Reach of Impreon Purchaed l l D D D D Expected Adverter Surplu Sngle home: (,0) or ( l D D )( v p) (0,) Intene ngle home: l D D ( D l D ) v ( D l D ) p (,0) or (0,) Mult-home: (,) 3 D l D l 3 ( D D ) v p Targeted mult-home: + ½ 3 (3 l v D D ) p (,) or (,) Intene mult-home: (,) l v ( D D ) p 4 4 We wll ue th frequency cap pecfcaton for nternal trackng n what follow a t repreent the mplet form of mperfect trackng that doe not create a capacty management ue for outlet. It key feature that there are dmnhng return to ncreang the rate of mpreon placed both wthn and acro outlet. For th reaon, the margnal adverter n the market wll ngle-home and mult-homer, f they ext, wll be hgh value adverter. Th fact tell u omethng about the reultng market equlbrum. Table llutrate the adverter dlemma that are when conumer wtch between outlet. A mult-homng adverter accee all of the loyal conumer on each outlet, but t may only reach a fracton of the wtcher. Whle ome wtcher may ee dtnct ad when they travere between outlet, other may ee the ame ad from a mult-homng adverter twce and other, not at all. The adverter then face a trade-off. It may prefer to ngle-home, acrfcng

19 8 loyal on another outlet but not watng any mpreon. On the other hand, t may decde to mult-home, and even go further, ncreang the number of mpreon acro all outlet. Th ncreae ther number of wated mpreon n return for mpreng a greater proporton of wtcher. Gven the two perod tructure of attenton, one mght thnk that th dlemma could be reolved by coordnatng on a tme perod. For ntance, an adverter could pay for mpreon only n the frt perod acro all outlet and none n the econd. However, th would requre that conumer were overlappng completely n tme n term of the readng habt. 6 There nothng n the two perod tructure that requre uch ynchronzaton, and we fnd t unrealtc for onlne browng. Conequently, we aume that coordnaton of mpreon n a gven perod of tme not poble Pure Sngle-Homng Conumer To begn, t ueful to aume a doe mot of tradtonal meda economc that conumer are all loyal and ngle-home on a ngle outlet (e.g., Anderon and Coate, 005); that, where = 0. When there no wtchng, outlet have a monopoly over acce to a hare of conumer and advertng prcng wll reflect that. 8 6 In the context of coordnatng attenton, the Superbowl command uch a large hare of attenton at a gven perod of tme that adverter can be aured of mpreng that hare of conumer. Conequently, the coordnaton opportunty afforded by th may be a reaon why ad pace command uch hgh payment per vewer durng that event. We explore a mlar effect below. 7 One mght wonder whether a pay-per-clck model of advertng would allevate the adverter dlemma. The anwer no: whatever the payment model, dplayng one advertement necearly dplace another. For th reaon, mot pay-per-clck advertng network charge adverter a prce per clck that nverely proportonal to the clck-through rate of the ad. Thu, the overall payment of the adverter per mpreon an ad that not clcked on often (perhap becaue t wated, f the adverter mult-home) ha to pay a proportonally hgher prce per clck to jutfy dplacng another adverter. 8 Note that th the uual aumpton n many model of meda competton. For example, Anderon and Coate (005) aume that broadcater compete for vewer and then are able to earn an advertng revenue, R(a) per conumer contngent upon the number of ad hown to them.

20 9 To ee th, recall our aumpton that adverter place the ame margnal value per conumer on reachng any number of conumer. Gven that there are no fxed cot of advertng wth dfferent outlet, an adverter, v, wll mult-home, advertng on any outlet whoe mpreon prce, p, le than v. There an ue, however, n that when an outlet ha many conumer, t need to track when an ad placed n front of a gven conumer. Our aumpton regardng nternal trackng mean outlet can track conumer wthn ther own outlet and o to acce all an outlet conumer an adverter need only pay for one mpreon per conumer. Thu, f t ha advertng nventory of a per perod, the market clearng prce for outlet the p that atfe F( p ) a. If P( z) F ( z) then p P( a ). Outlet proft wll be: x P( a )a ; the ame proft a the perfect trackng benchmark. Thu, contngent upon the aumpton that = 0, th an effcent allocaton of adverter to conumer. 9 Moreover, proft are nvarant to the number of outlet Swtcher and Outlet Advertng Demand We now conder adverter demand when there are wtchng conumer and mperfect trackng. When adverter chooe ther advertng ntenty and outlet allocaton, the decreang ncremental reach of purchang an addtonal mpreon mple that adverter wll ort, n equlbrum, wth hgher value type purchang weakly more mpreon. Table demontrate th wth relaton to ortng cut-off (contnung our aumpton of ymmetrc outlet wth l l l D D D and a a a ). 9 Of coure, f capacty were endogenou, each outlet ha an ncentve to retrct capacty relatve to what mght be ocally optmal. 30 A dcued n the ntroducton, we aume that the readerhp hare x doe not depend on the number of ad. The tandard model of meda economc focu on th effect, and how that competton for uer reduce the equlbrum output of ad. We do not formally model th effect a t ha been well-tuded n the extng lterature.

21 0 Choce Table : Adverter Indfference Pont Addtonal expendture Value from addtonal reach From (0,0) to (,0) p/ l v( D D ) From (,0) to (,) p/ l v( D D ) Indfferent adverter D v p v 4 4 v 3 D Indfferent adverter D p - From (,0) to (,0) p/ v D - v p From (,) or (,0) to (,) p/ v D or 4 D v v 3 p D 3 p v D 3 D p Note that no adverter wll chooe a rate of 4 (ntene mult-homng) a a rate of 3 generate the maxmal expected reach all conumer wll ee ther ad. Relatvely hgh value adverter wll be le wllng to m conumer and wll chooe a rate of 3; e.g., (,). However, th wll only occur f the prce low enough for the hghet value adverter n the market, call th adverter, V, to engage n a targeted mult-home trategy; that, v V p D V or p ( D ) V. 3 Relatvely medum value adverter wll chooe a rate of ; ay, (,0) or (,) dependng upon whether D hgher or lower than /3. Fnally, lower value cutomer wll target loyal cutomer and hence, ngle-home wth a rate of. Gven th, for each conumer t expect to attract, an outlet receve a hare of nglehomng adverter ( F( v) F( v ) ) and, f D relatvely low, an mpreon from each multhomer ( Fv ( ) or F( v3) F( v ) a the cae may be) and a further half (under ymmetry) of mult-homer (f any) who have mpreon on one outlet ( Fv ( 3) ). Thu, outlet demand : l ( D D ) ( F( v) F( v)) ( F( v)) ( F( v3)) V v l f ( D D ) F( v ) F( v ) ( F( v )) V v 3 3 () where

22 3 a ( F ( v3 ) F ( v ) ( F ( v 3 ))) max ( ( 3 3,0 a F v3 ) F ( v ) ( F ( v 3 ))) a j( F ( v3 ) F ( v ) ( F ( v 3 ))) a ( F ( v )) max a ( ( )) ( ( )),0 F v a j F v V f V v 3 v 3 () That, outlet pare capacty after ale to mult-homng adverter and we aume that ngle-homer are allocated n equlbrum to each outlet accordng to ther pare capacty (f any). Under ymmetry, note that. Th allow u to prove our frt propoton. Propoton. Outlet (and aggregate) demand decreang wth D around D 0. The proof relatvely traghtforward. Note frt, that a D 0, v3. Thu, around D 0, no adverter chooe to purchae more than two mpreon acro outlet. Note alo that at D 0, v v p and, total demand for an outlet, q( p) F( p). If D 0 whle v3 V, then v v p and q( p) F( p) F( v ) F( p). Thu, outlet demand fall; that, for any gven prce, p, fewer mpreon are purchaed. 3.4 Swtcher and Outlet Proft We are now n a poton to examne the mpact of a greater hare of wtcher on outlet proft. To olve for the market equlbrum, each outlet demand ha to equal t upply. For an outlet, t total upply of advertng nventory gven by: a D l ad (3) It wll often be convenent n what follow to expre varable n a per cutomer ba. In th cae, advertng nventory on outlet a. Gven th upply, we now conder poble equlbrum allocaton of adverter to outlet. Frt, t poble that 0 and there are only mult-homng adverter n the

23 market? For th to be an equlbrum, the wllngne to pay of a mult-homng adverter for an mpreon on an outlet mut exceed the wllngne to pay of a ngle-homng adverter for an mpreon on an outlet. That, the followng two nequalte mut hold: ( D D ) v ( D D ) p ( D D )( v p ) (4) l l l 4 ( D D ) v ( D D ) p ( D D )( v p ) (5) l l l 4 Note that the margnal adverter on each outlet would have to be a mult-homer and o v v. Note alo that becaue the jut excluded adverter (wth value v ) would be wllng to pay that for a ngle mpreon on an outlet, p v for each outlet. It clear that a goe to zero, the wllngne to pay of the jut excluded adverter to ngle-home exceed the wllngne to pay of the margnal mult-homng adverter for t margnal mpreon. That, the LHS of (4) and (5) become negatve whle the RHS zero f D 0. If D 0, at leat one outlet mut, n equlbrum, ell to ngle-homng adverter. That adverter et the margnal prce n the market. If D 0, (4) and (5) hold wth equalty and o a pure mult-homng equlbrum can are. Second, an equlbrum where each outlet ha both mult-homng and ngle-homng adverter poble? That, an equlbrum nvolvng 0 for all. For th to are, demand from () mut equal upply from (3) wth ymmetry mplyng that. Fnally, t poble that there are only ngle-homng adverter n equlbrum? Th would are f for the hghet value adverter (V), t wllngne to pay for an addtonal mpreon on an addtonal outlet were negatve; that, v p V. In th cae, D and equatng upply to demand mple a ( F( p)) or p F ( 4 a). Thu, th

24 3 equlbrum wll are f F( V( D )) 4a. Note, however, that a D approache 0, th equlbrum allocaton cannot are. Ung th, we can prove the followng. Propoton. Equlbrum prce and proft are decreang n D around D 0. Th drectly follow from Propoton and (3); that, aggregate demand decreae whle upply tay contant for each outlet. Intutvely, when there are wtcher, a we move from nowtchng, the margnal mpreon of a hgher valued adverter (on a econd outlet) out-bd by the frt mpreon of the jut excluded adverter. Conequently, the margnal adverter n the market of lower value a D re. Note alo that th mple that the total number of adverter purchang mpreon ncreae. Whle Propoton and characterze change n prce and proft a the number of wtcher ncreae from D 0, t alo the cae that a greater number of wtcher change the compoton of adverter choce. In partcular, an ncreae n D ncreae v (wth margnal mult-homer becomng ngle-homer) and decreae v 3 (wth hgh value mult-homer ncreang ther frequency on one outlet). Dependng upon the rate of change of thee et, aggregate demand may ncreae or decreae. Indeed, an ncreae could occur uch that proft eventually become hgher than proft when D 0. F() v To demontrate th, we aume here a pecfc unform dtrbuton of adverter, v wth V =. Under th aumpton, market clearng mpreon prce are: D ( D ) (3 4 ) a 4 D ( D ) f D p p ( D ) ( a) D p 4D (6)

25 4 Note that under ymmetry, D x. Thu, the number of wtcher cannot exceed that level. When there are no adverter purchang multple mpreon on a ngle outlet, prce declne wth D. However, a D re, there come a pont at whch prce low enough that adverter do purchae multple mpreon. The one that do o are the nframargnal adverter, and o a D re beyond th pont, prce, and hence, outlet proft, ( l p D a D a) pa, re. 3 The followng propoton ummarze how equlbrum proft depend on D. Propoton 3. Aume that F(.) unform on [0,] and there are two ymmetrc outlet. Suppoe alo that a a a. Then an outlet equlbrum proft are a follow: ( D ), ( a)a ; () For D mn8 a,4( a) ( a) 4a () For D a a 4( a) ( ) 4 and D 8 () For D 8a, ( 4 a)a. 4D ( ) a, D D (3 4 a ) a 4 D ( D ) Th characterzaton of equlbrum proft provde ome nght nto the mpact of the Internet on the new meda. To the extent that the Internet ha facltated wtchng, thee reult ugget that proft wll declne but wll eventually re a wtchng become eaer (ee Fgure One). When the hare of wtcher low, competton for the margnal adverter puhe down total outlet ad revenue. However, a the wtcher hare become large, the comparatve tatc change gn and proft re wth the number of wtcher. Th becaue hgh value adverter begn to purchae multple mpreon on ndvdual outlet. Th take up carce capacty and exclude lower valued adverter who were ettng the mpreon prce. The end reult that more wtcher drve hgher mpreon prce and proft. 3 It ueful to check whether multple equlbra are poble. To rule th out a a concern note that market clearng prce n both cae above are equal f: D (-D ) 4+D (-D ) p = (- a) - ( -D ) (3-4a) = ( ). At th level of D, 4-D (- a) Þ D = (- a) - (- a) + 4a (- a) + 4a ;.e., D /. So, for gven ad capacte, there no ue of multple equlbra.

26 5 Fgure One: Outlet Proft a a functon of D ( a 0.4 ) Imperfect Trackng Perfect Trackng It mportant to note, however, that the reult that proft wll re wth D rele on ad capacty beng hgh enough. If ad capacty carce, mpreon prce never fall to a level that make t worthwhle for nfra-margnal adverter to purchae multple mpreon on ndvdual outlet. The poblty that adverter wll purchae multple mpreon at a rate that lkely lead to lkely wate borne out by the ComScore data. For ntance, they etmate that n the frt quarter of 0, almot. trllon dplay ad were delvered n the US. 3 Of thee, 9.5 bllon were purchaed by AT&T, 6.6 bllon by Experan Interactve and. bllon by Scottrade. If the entre US populaton urfed the net daly durng that tme, they would ee one AT&T ad per day. 3.5 Aymmetrc ad capacte Whle the above analy allowed for ome dfference between outlet n ad capacte, the man reult on mperfect trackng aumed ymmetry. Here we conder what happen when ad capacte can be aymmetrc. We tudy whether aymmetry can permt a ngle market clearng prce for advertng and, f not, what do prce look lke? Importantly, doe an outlet 3 _._Trllon_Impreon_n_Q_0

27 6 have an ncentve to reduce ad capacty n order to exerce market power n advertng market? The followng propoton ummarze the equlbrum outcome. Propoton 4. Suppoe that outlet are ymmetrc n readerhp, F() v a v and V = but that 4a D a. If a [0, ] and a[ ( a( D ) D,], then, n equlbrum, p p. ( D ) Otherwe, p p. The proof (n the appendx) demontrate that proft are: 4 ( D )( a )a (7) ( a )a a D 4 f D ( a )a D D a 4 (8) Here t clear that havng a maller ad capacty not necearly an advantage for outlet even f t doe reult n a hgher mpreon prce. What doe th mply for the ncentve of an outlet to ue capacty to exerce market power? When ad capacte are ymmetrc, outlet have ncentve akn to thoe of quantty duopolt n choong ther ad capacte. However, whle locally th may be the cae, each can unlaterally generate an aymmetrc equlbrum of the form decrbed n Propoton 4. When t rval capacty low, an outlet ha an ncentve to expand capacty o that there are no nglehomer on the rval outlet. In contrat, when a rval outlet ha very hgh capacty, an outlet may chooe a low capacty o a to only ell to mult-homng adverter. Over a non-trval range of D, no pure trategy equlbrum ext. 33 However, f outlet chooe capacte equentally, the reultng equlbrum aymmetrc wth one outlet choong a low and the other a hgh ad capacty convergng to ymmetry a D become mall. Nonethele, f each ad capacty 33 A proof avalable from the author.

28 7 contraned to be no greater than ¼, then that the reultng equlbrum and no aymmetrc outcome occur. 3.6 Aymmetrc outlet Aymmetrc capacty choce can lead to dfferental prce but do not confer abolute potonal advantage on outlet. We now conder what happen when outlet have dfferent content qualty wth one outlet beng able to generate a hgher readerhp hare than the other; n l l partcular, when x x D D. In th cae, we demontrate that outlet command a potonal advantage n the advertng market that lead to t beng able to earn hgher mpreon prce than outlet alongde havng a hgher readerhp hare. To ee th, oberve that, f there uffcent capacty on both outlet, ngle homng adverter wll ort on to outlet frt. Th becaue, for a gven v, f mpreon prce were l l the ame on each outlet (equal to p) then ( D D )( v p) ( D D )( v p). However, a mpreon prce wll dffer n equlbrum (pecfcally, t mut be the cae that p p f there are ngle homer on outlet ), the margnal ngle-homer on outlet wll be gven by l l ( D p D p ) D ( p p ) l l ( D D) v l whle v p. Note that v v ( D D )( p p) It mportant to emphaze that t the extence of wtchng conumer (.e., D 0 ) that generate th ortng. If there are no wtcher, then the margnal adverter on each outlet competng wth a mult-homng adverter for ther margnal mpreon. In th cae, a there are no dmnhng return to addtonal mpreon, a hgher value mult-homng adverter wll outbd a maller value ngle-homng adverter for that lot. It only when there are wtcher 34 Of coure, there may be no ngle-homer on outlet whch wll alter th ntuton a we dcu below.