Targeting in Advertising Markets: Implications for New and Old Media

Transcription

1 Targeting in Advertising Markets: Implications for New and Old Media joint with Alessandro Bonatti (MIT) Interface Computer Science and Economics Cornell University September 2009

2 Introduction the role of the internet in the advertising environment display advertising sponsored search important implications for traditional media in particular print media distinct feature of internet advertising is the ability to target attribute (demographic) targeting behavioral, contextual targeting

3 A Datapoint

4 More Datapoints

5 Advertising and Targeting a model of (di erential) targeting across markets analyze role of targeting: for the equilibrium allocation of advertisements across di erent media/advertising market for the equilibrium price of advertising analyze di erential targeting and competition in particular allocative and revenue implications for new and old media, o ine and online media

6 Advertising as Matching an advertisement matches a customer and a product the role of advertising is to turn a potential, interested consumer into an actual customer advertising markets operate under substantial friction message may reach the wrong consumer message may reach the same consumer repeatedly targeting lowers the friction in the matching market

7 Results: Single Homing each consumer is only present in one advertising market: single homing advertising allocation in a single advertising market advertising allocation in many advertising markets role of targeting social value of advertising is increasing with targeting equilibrium price of advertising in decreasing with targeting

8 Results: Dual Homing each consumer is present in two media markets: o ine and online advertising allocation with competing media outlets general advertising vs. display advertising general advertising vs. sponsored search

9 Product Markets a continuum of products ( = rms): i = [0, ) a continuum of consumers with unit mass each consumer is interested in speci c product i product i has share of interested consumers: Z s i 0, s i di = 1 market share s i is declining in i

10 Distribution in Product Markets exponential distribution of consumers in product markets i: s i = λe λi λ 2 (0, ) measures concentration in product markets a larger λ represents more consumer in fewer product markets

11 Advertising Markets a continuum of advertising markets: k = [0, ) representing outlets, media, websites, searches share of consumers who are interested in product i and present in advertising market k : s i,k 0 size of advertising market k is s k : Z s k = s i,k di share of consumers present in advertising market k conditional on being interested in product i: s kji

12 Conditional Distribution in Advertising Markets conditional distribution of consumer i across advertising markets k: and (with truncation at 0) s kji = γe γ(i k) 0 < k i s 0ji = e γi 0 = k i γ 2 [0, ) measures concentration in advertising markets a larger γ represents more consumers of product i in nearby advertising markets: k i a larger γ facilitates targeting distribution of consumer across markets is upper triangular: s i,k = 0 for all i < k

13 Advertising as Random Matching rm i sends messages m i,k to consumers in advertising mkt k each message is received with uniform probability by one of the consumers in advertising market k an interested consumer of product i becomes an active consumer of product i (i.e. makes a purchase) if he receives a message from rm i a consumer in advertising market k receives at least one message from i with probability a k (m i,k ), 1 exp mi,k s k

14 Product Market i = 0 i = 1 i = 2 i = 3 i = 4 different segment sizes λ>0

15 Product Markets i = 0 i = 1 i = 2 i = 3 i = 4 different segment sizes λ>0 different products

16 Perfect Targeting (δ= ) Product Markets i = 0 i = 1 i = 2 i = 3 i = 4 Advertising Markets k = 0 k = 1 k = 2 k = 3 k = 4

17 Imperfect Targeting (0<δ< ) Product Markets i = 0 i = 1 i = 2 i = 3 i = 4 Advertising Markets k = 0 k = 1 k = 2 k = 3 k = 4

18 Zero Targeting (δ=0) Product Markets i = 0 i = 1 i = 2 i = 3 i = 4 Advertising Market k = 0

19 Single Advertising Market zero targeting: γ = 0 and thus: s k=0 = 1, s k>0 = 0 competitive market for advertisements given supply of advertising space/time/imprints M advertising space M can be interpreted as average exposure/attention time to ads each rm i can purchase messages m i at unit price determined by market clearing: p 0

20 The Firms s Problem the value of rm i is maximized by choosing m i : V i = max m i [s i a (m i ) p m i ] or V i = max m i [s i (1 exp ( m i )) p m i ] each sale generates revenue $1, rms only di er in size s i demand for advertising by rm i : m i = ln s i p

21 Competitive Equilibrium given advertising space (= supply) M: the largest I rms enter the advertising market: r 2M I = λ the equilibrium demand m i is the equilibrium price p is: m i = p 2λM λi p = λe p 2λM

22 Social Value of Advertising competitive equilibrium implements socially e cient allocation given λ how does the social value of advertising depend on product market concentration an increase in concentration measure λ leads to fewer lost messages, though it may increase redundant messages social value of advertising is increasing in concentration measure λ

23 Product Market Concentration the equilibrium price p equals the willingness to pay of the marginal advertiser p = λe p 2λM Proposition (Comparative Statics) The equilibrium price of advertising p is initially increasing in λ and then decreasing in λ. with low concentration in the product market, marginal rm and average rm have similar consumer share an increase in λ increases the consumer share of all advertising rms, increasing returns and willingness to pay with high concentration in the product market, marginal rm and average rm have dissimilar consumer shares, and... with large supply M reversal occurs earlier...

24 Many Advertising Markets positive targeting: γ 2 (0, ) supply of messages proportional to size s k of market: M k = s k M some stationarity property due to geometric distribution: s i,k s k = s i+n,k+n s k+n, 8n 0 but average market share is declining in i : Z si,k s k s kji dk

25 Imperfect Targeting (0<δ< ) Product Markets i = 0 i = 1 i = 2 i = 3 i = 4 Advertising Markets k = 0 k = 1 k = 2 k = 3 k = 4

26 Competitive Equilibrium with Many Advertising Markets the largest rms present in advertising market k, i 2 [k, k + I ] enter: s I 2M = λ + γ the equilibrium demand m i,k is m i,k = γλe λk s 2M γ + λ λ (i k)! the equilibrium price p is: p = (λ + γ) e p 2(λ+γ)M with targeting γ > 0, all rms advertise somewhere ( long tail )

27 Social Value of Targeting an increase in γ leads to an increase in relative size of consumer segment i in advertising market i : s i,k=i s k=i = γ + λ an increase in γ increases the value of a message of rm i in the advertising market k = i match volume increases with improved targeting the social value of advertising is increasing in targeting everywhere (note competitive equilibrium leads to pareto e cient allocation)

28 Equilibrium Price of Targeting the equilibrium price p represents the willingness to pay of the marginal advertiser Proposition 1 The equilibrium price of advertising p is initially increasing in γ and then decreasing in γ. 2 If M or λ are large, then p is decreasing everywhere in γ. despite the increased social value of advertising, the equilibrium price of advertising is decreasing in the targeting ability over a large range/everywhere

29 Dual Homing each consumer is present in two advertising markets: dual homing consider a general advertising market and a class of targeted advertising markets targeted medium: display advertising sponsored search each rm can place messages in two media markets a i and a i,k are fractions reached in general advertising and targeted advertising market /k by rm i a i + a i,k a i a i,k redundancy across media (newspaper vs. yahoo portal)

30 Competition between Traditional Advertisers traditional advertising in two di erent advertising markets: Z Z m i di = M and n i di = N value function of rm i is: V i = max m i,n i si 1 e m i e n i p m m i p n n i note: frequency loss messages in these two general market are (perfect) substitutes

31 Competitive Equilibrium with perfect substitutes, equilibrium prices p m and p n equalize: p = p m = p n = λe p 2λ(M +N ) consequently the participating rms are I = r 2 (M + N) and the sum of the demands are: q mi + ni = 2λ (M + N) λ λi. size of total market matters, but composition does not

32 Display Advertising general advertising m i and targeted advertising n i,k perfectly targeted advertising: γ = and thus relevant advertising market for rm i is k = i value function of rm i is: V i = max m i, n i,i s i 1 e m i e n i,i s i pm i p i n i,i

33 Equilibrium with Display Advertising the equilibrium price in the o ine market is p = λe (p 2λM +N) (1) the demand in the o ine market is then mi = p 2λM λi (2) the price in the online market is pi = e (p 2λM +N λi) (3)

34 The IIn uence of Targeted Advertising consider constant attention/exposure to advertising K: M + N = K Proposition The equilibrium price of o ine advertising p and online advertising pi is decreasing in exposure N allocated to the online advertising (unless N is close to K). again, the social value of advertising is increasing in N

35 Equilibrium with Sponsored Search generalized second price auction depth of link list attention time N devoted to sponsored search price decline is more pronounced as sponsored search has less, perhaps close to zero, duplication cost

36 Many Open Issues role / function of social networks role of prominence / portals revenue maximization, package/campaign pricing value of advertising medium to consumer congestion, overexposure by customer across advertisers advertising exchanges