Wll the Internet etroy the New Meda? or Can Onlne Advertng Market Save the Meda? by Suan Athey, Emlo Calvano and Johua S. Gan * Frt raft: October, 009 Th Veron: November, 00 PRELIMINARY PLEASE O NOT QUOTE WITHOUT PERMISSION FAVOURABLE CITATIONS WELCOME We provde a model of the market for advertng on new meda outlet when conumer have opportunte to wtch between outlet. We hypotheze that the move to onlne new content ha facltated greater conumer wtchng, a well a heterogenety n conumer wtchng pattern. The new outlet are modeled a competng two-ded platform brngng together heterogeneou, partally mult-homng conumer wth adverter wth heterogeneou valuaton for reachng conumer, and the mult-homng behavor of the adverter determned endogenouly. The preence of wtchng conumer mean that, n the abence of certan conumer trackng technologe, carce advertng capacty taken up by adverter purchang wated mpreon on outlet, a a gven adverter may reach the ame conumer too many tme. Th ha ubtle effect on the equlbrum prce for ad mpreon and the proft of outlet, and t may lead to heterogenety n the mult-homng behavor of adverter. We characterze the mpact of greater conumer wtchng on outlet proft and 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. In addton, we analyze the mpact of blog, aggregator and paywall on outlet proft from advertng, whch ultmately determne market tructure and outlet qualty nvetment. * Harvard (Athey), Boccon (Calvano) Melbourne Bune School (Gan). We thank partcpant at the ZEW Platform Conference (Mannhem), Touloue Network Conference (Seattle), 00 Meda Economc Workhop (CUNY) and at emnar at artmouth, Harvard, Yale, Vrgna, Toronto, Chcago, Columba, George Maon, London School of Economc, Boton College and Google for helpful comment. 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.
Introducton The ue of whether the Internet wll permanently detroy the new meda currently a bg new topc. Th, n part, a repone to fallng advertng revenue and ue aocated wth the lo of related ervce (uch a clafed ad) that hared the cot aocated wth new delvery. However, t alo a reflecton of the ncreaed competton for attenton that new outlet face from new meda (ncludng web-only new, blog and new aggregator). There are concern that a lo of complementary revenue a well a fragmentaton n the meda mght undermne ncentve to nvet n qualty journalm. There are challenge wthn the core of the meda ndutry n term of trantonng from a paper to an onlne world. Frt of all, there a general concern about the qualty of web vtor veru paper reader n term of ther ablty to generate advertng revenue. 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 term of advertng effectvene, th an ue a adverter who place ad on multple outlet cannot tell f the conumer they are mpreng are really new or whether there wate n the mpreon they pay for. Nonethele, counterng th are clam that technology may allow advertng market to mprove n ther matchng effcency. In partcular, t ha alway been the cae that conumer attenton wa dvded amongt dfferent outlet (e.g., newpaper, rado, televon) creatng the problem of wated mpreon. Wth conumer movng onlne there the potental to employ trackng technology to enure that mpreon are not wated. Th ha already begun wth repect to geo-trackng that enure that local
3 adverter placng ad on natonal webte are only delverng ad to local cutomer (Athey and Gan, 00). However, n the future, t concevable that technologe could track a conumer acro outlet very wdely (from the net, to moble phone, etc). Ad platform may develop that erve many outlet and offer the followng propoton: place an ad wth our platform and we wll delver t to the conumer exactly three tme durng th perod on ome outlet. Th paper am to preent a formal analy of the propect for advertng-funded content on the Internet. One mportant tartng pont that an economc analy of advertng market hould be grounded n fundamental namely, of upply and demand o that change, uch a thoe brought about by the Internet, can be examned n a content manner. To ee why gnorng fundamental dangerou conder the aerton 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 omenc 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, t tll the cae that effectve advertng nventory requre thoe ad to be vewed by an actual conumer. The attenton of thoe conumer tll lmted and that carcty that wll lmt the avalable advertng capacty. Moreover, t that attenton that adverter tll wh to compete for and hence, the prce of ad unlkely to become zero. Our model et-up (n Secton ) tree that fxed nature of conumer attenton a well a the contant demand from adverter for that attenton.
4 There are many dfferent path by whch we could examne the mpact of the Internet on advertng-funded content. Thee nclude an ncreae n the number of outlet a well a the role of non-tradtonal outlet (uch a new portal and aggregator) that can attract conumer attenton and hence, adverter. Each of thee ha the potental to mpact on the proft of meda outlet. Here, however, we focu on the ablty of onlne content to make t eaer for conumer to 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 they 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 anyone outlet ource. 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. A we wll demontrate, havng conumer who wtch between outlet preent a modelng challenge n the context of the tradtonal meda economc lterature a well a the lterature on two-ded market. Thoe lterature normally aume that partcpant on one-de of the market ether ngle-home (conumng one outlet) or mult-home perfectly (conumng all outlet). For ntance, n Anderon and Coate (005), televon vewer conume one channel
5 and adverter place ad on all channel. We outlne thee benchmark cae n Secton. The man reult n the tradtonal model of ngle-homng conumer that outlet compete for conumer by reducng ad pace, and then charge monopoly prce to adverter whng to adverte to thoe conumer. In th paper, we do not focu on the conumer dutlty of ad pace, but ntead focu on conumer wtchng behavor. In th paper, a conumer have an ncreaed ablty to wtch between outlet, ome hare of conumer ngle-home whle other mult-home. For adverter, th mean that matchng ad mpreon wth conumer a challenge. An adverter who mult-home wll fnd that ome of ther mpreon are vewed by the ame conumer more than once a they wtch between outlet. Thoe mpreon are wated. An adverter who ngle-home, wll m ome proporton of conumer even f they can mnmze payment for wated mpreon. We deal wth th ue n two way. In Secton 3 we conder the poblty that trackng technologe can mplement oluton to avod wate and to mplfy the decon of adverter. Such trackng technologe can, n an deal world, dentfy mpreon placed n front of partcular conumer regardle of the outlet and enure that thoe mpreon are not repeated even f the conumer wtche between outlet. We characterze the equlbrum outcome under perfect trackng and alo dentfy whch type of outlet are lkely to beneft mot from uch technologe. We alo note that, even n th cae, the mpact of conumer wtchng wll be to make thoe outlet compete more ntenvely wth one another for adverter and o can be expected to generate ome dpaton of proft relatve to benchmark cae. Larger outlet (thoe wth more vewer) are harmed more by ncreae n wtchng behavor. Thee perfect trackng technologe have only begun to be developed and have yet to dffue. In Secton 4, we conder the return to the adopton of technologe by modelng
6 advertng market n ther abence. Th requre u to conder the mxed ngle and multhomng conumer outcome and to olve for the reultng equlbrum n the advertng market. The modelng challenge are becaue the prce that clear the market alo mpact on the qualty of lkely matche between conumer and adverter. Nonethele, we demontrate that a ortng equlbrum ext where hgh value adverter mult-home and, n ome cae, ncreae the frequency of mpreon o a not to m conumer, whle lower value adverter ngle-home. Crtcally, ngle-homng adverter are alway the margnal adverter n the market, but multple mpreon for hgh value adverter aborb nframargnal capacty. The balance between the margnal and nframargnal mean that, n ome cae, for fxed (and large) ad capacty, a hgher ablty of conumer to wtch between outlet may be aocated wth hgher, not lower, outlet proft. Conequently, uch outlet may have no ncentve to adopt trackng technologe. However, when outlet elect ther ad capacte endogenouly, trackng mprove frm proft. We then turn to examne the mpact of blog on ndutry outcome. We model blog a outlet that attract conumer attenton, but have low or zero ad capacty. Blog generate competng effect. The obvou and drect effect that they teal conumer attenton and thu revenue from extng outlet. There, however, an ndrect effect: they alo reduce the effectve upply of ad pace, whch ncreae advertng prce. They can actually ncreae proft for ome outlet, f they dproportonately attract wtcher, nce wtcher are the drvng force behnd nter-outlet competton for adverter. Next, we conder the mpact of paywall, whereby frm charge for content. Paywall can alo have an mpact on advertng market equlbra. They tend to reduce conumer wtchng, o even frm that do not ue paywall beneft from the ntroducton of paywall by
7 other. And frm wth paywall tend to attract more loyal conumer, o they can charge hgher prce to adverter n order to reach thoe conumer. Fnally, we oberve that ad platform may are to addre many of the problem we have raed n th paper. They may form agreement wth multple new outlet to hare trackng nformaton a well a nformaton about cutomer, o that outlet can better match advertng to uer, ncreang the effcency of advertng. It alo poble that they could attempt to help outlet olve what the ndutry call the yeld management problem and what economt would call the competton problem that, they could potentally attempt to help outlet coordnate on reducng capacty. However, nce there would be natural econome of cale n ad platform (the more outlet on a platform, the better ad trackng and the more conumer nformaton that could be obtaned, n addton to the natural effect that more outlet attract more adverter f there are fxed cot of engagng wth an ad platform), there ome reaon to be concerned about concentraton n the ad platform market. Wth a monopoly ad platform, the total advertng revenue mght be hgh, but the ad platform could extract a large hare of t. 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 (that, a we move from a tradtonal advertng world to one delvered electroncally). Conumer Attenton and Adverter Value Conumer have carce attenton that they devote to conumng varou bt of meda. In addton, conumer are potental purchaer of product and can be matched wth frm through
8 advertng. We aume that conumer purchae product at a lower rate than they conume meda. For example, 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. Conequently, what matter for advertng the total attenton a conumer devote to vewng meda over the coure of a day. However, whch meda outlet conumer vew durng that day mpact upon the opportunte to place ad n front of them. Formally, uppoe there are T perod n whch adverter who put an mpreon n front of a conumer n that perod receve a value, v [0,] ; dtrbuted dentcally acro conumer wth cumulatve dtrbuton functon, F(v). The T perod may repreent hour of the day or day of the week or omethng mlar. It aumed that a conumer can only read one unt of content per perod. In th repect, T a meaure of the amount of conumer attenton. We let a be the quantty of advertng that outlet preent to conumer per unt of tme. We aume that all advertng equally effectve regardle of the quantty, and our bae model gnore conumer dutlty of ad for mplcty. (Of coure, a natural generalzaton would be to relax th aumpton, and we dcu th extenon at the end of the paper.) In each ecton, we tart by analyzng the model wth exogenou ad capacty, and then endogenze t. In each perod that a conumer vt outlet, a conumer mpreed by a ad and f that happen n all perod, the conumer mpreed by Ta ad. Ta the total (maxmum poble) amount of advertng nventory ntroduced to the market by outlet, a well a the maxmum quantty of adverter who could pobly reach an ndvdual conumer that tay wth outlet for all 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). We wll explore the mplcaton of the latter pecfcaton n Secton 5. below.
9 perod (f each adverter purchaed at mot one ad per conumer). If th quantty avalable, and adverter are ranked by value n term of ratonng of acce to conumer attenton, then the margnal adverter, v, defned by Fv ( ) = Ta. We retrct attenton, therefore, to cae where max a < / T o there an nteror oluton. Outlet emand and Advertng Inventory How do conumer allocate attenton to dfferent meda outlet? We aume that whenever a conumer ha an opportunty to chooe, outlet wll be choen wth probablty x. Thu, x a meaure of an outlet ntrnc qualty. Note that, f a conumer chooe an outlet, {,..., I}, and then had no opportunty to wtch thereafter, outlet maxmum poble advertng nventory would be xat. We aume, however, that an opportunty for a conumer to wtch outlet arrve (ndependently) each perod wth probablty, ρ. For convenence, throughout th paper we aume that T = o, n effect, there, at mot, a ngle opportunty to wtch. 3 Thu, the total expected amount of attenton gong to : ( ) x x ( ρ) ρx ( x ) ρx = x () However, for an outlet, what mportant dtnguhng between conumer who are loyal to t (ether by choce or lack of opportunty) and thoe who are expected to wtch between outlet. Thu, uppoe that l the hare of conumer loyal to (.e., ngle-homer) and j the Outlet qualty may be endogenou and below we wll conder what happen when outlet nvet n qualty pror to competng for conumer. You can magne that th probablty drawn from a logt choce model that can be appled whenever a conumer ha an opportunty to chooe (or wtch) outlet. 3 If there are more than two perod, then there are many opportunte to wtch, and there wll be many dfferent type of wtcher, e.g. thoe who pend dfferent fracton of ther tme wth dfferent outlet. Th complcate the modelng ubtantally wthout changng the bac economc tradeoff.
0 hare conumer who wtch between outlet and j (.e., mult-homer) n any gven perod, then: l = x x ( x ) ρ () = ρ xx (3) j j Note that when there are no wtchng opportunte (.e., ρ = 0 ), {, j }. l = x and = 0 for all j We oberve that for much of our analy, becaue we take outlet ze (x ) to be exogenou, the key varable are the proporton of wtcher and the proporton of loyal conumer for each outlet; the pecfc model of conumer wtchng doe not affect the reult. 3 Benchmark To begn, t ueful to examne two benchmark for the advertng market: the frt-bet and pure ngle-homng conumer. Th wll allow u to examne the mpact of poble trackng technologe a well a the mpact of the Internet when uch technologe are not avalable. 3. Frt Bet Allocaton Gven outlet qualty and conumer behavor (n wtchng), note that 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. A there are I outlet, th mean that there are I I( I ) dfferent conumer type (.e., I loyal and the remander wtcher between two dfferent outlet). A each adverter value contant n the number of conumer reached, we can conder allocatng adverter to each conumer eparately; a the only dtncton among
conumer ther wtchng type, we conder allocatng adverter to each uch type. To acheve frt bet the hghet value adverter hould be allocated frt to advertng nventory generated by each wtchng type. 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 (n mot of the analy that follow we wll conder only two outlet o that, wth only two perod, we can drop the j ubcrpt on wtcher) Then a frt bet allocaton nvolve allocatng all adverter wth v v to outlet loyal conumer and thoe wth v v, j to thoe who wtch between and j. Th done for all and all {, j } wth j. Thu, the margnal adverter wll be determned by: a = F( v ) and a aj = F( v, j). 3. Pure Sngle-Homng Conumer Another benchmark come from tradtonal meda economc that aume that conumer pay attenton to only a ngle outlet (e.g., Anderon and Coate, 005); that, n the language of the two-ded market lterature, all conumer ngle-home. Here, th correpond to a tuaton where there are no opportunte for conumer wtchng (.e., ρ = 0); ay, correpondng to a world where conumer read one newpaper per day. We term th envronment NS. In th cae, outlet attract a x hare of conumer and then ell t advertng nventory, x a, to adverter. In effect, th envronment gve outlet a monopoly over acce to a hare of conumer and wll et advertng prcng term to reflect that. 4 To ee th, recall our aumpton that adverter place the ame margnal value on reachng any conumer. Thu, adverter wll mult-home and pay for mpreon on all outlet. 4 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.
Conequently, an adverter wth value, v, wll adverte 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. Th an ue we wll return to below. The common aumpton that 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 Pz ( ) F ( z) then p = P( a ). Outlet proft wll be: π = x P( a )a. Note that, contngent upon the aumpton that ρ = 0, th a frt-bet allocaton when advertng capacty exogenou. Of coure, f advertng capacty were endogenouly choen by each outlet, then the capacty choen wll be le than what would be choen by a ocal planner th jut a tandard monopoly output problem, nce each outlet act a a monopolt over t loyal conumer. In much of our analy we wll conder the pecal cae of adverter value wth dtrbuton Fv ( ) = v β wth β > 0 Then, a tandard, the monopoly problem for NS β outlet would chooe a to maxmze π reultng n ˆ = ( ) and a proft level of a β β NS β π x β ( β ) =. 3.3 No trackng: Another benchmark to conder what happen when outlet have no ablty whatoever to nternally track mpreon and to control matchng between adverter and conumer. Th the aumpton made by Butter (977) and Bergemann and Bonatt (00). In the early day of the Internet, webte had no ablty to track conumer even wthn outlet and even today
3 wth prvacy ettng uch trackng may not be poble. What that mean that f an outlet had x conumer n a gven tme perod, f an adverter placed n mpreon on that outlet n that tme perod, the expected number of unque conumer mpreon the adverter would receve n / would be ( ) n x x ( ) x( e ). x To examne adverter behavor n th envronment, let each outlet own hare of loyal and wtchng conumer be: y l l l and y l (4) If n the number of mpreon purchaed on outlet, an adverter, v, olve the followng: l ny l / l l ny l / l ( ny ny )/ { n, n} e v e v e v np np max ( ) ( ) ( ) (5) Notce that wtcher reult n a lower probablty of a ucceful match than loyal conumer. Nonethele, the extence of loyal conumer caue adverter to want to pread ther mpreon acro outlet, all other thng beng equal. Specfcally, uppoe that a a and = o that p = p, then (5) reduce to: l l max n n ( e ) v ( e ) v ( e ) v ( n n ) p (6) l n l n n n {, } Here, t eay to demontrate that adverter optmally plt ther mpreon equally acro outlet wth n = n = ln[ v/ p] and adverter urplu equal to ln[ v/ p] ( e ) v ln[ v/ p] p; ndependent of the hare of wtcher. Conequently, under ymmetry, total advertng upply alo ndependent of the wtcher hare and hence, equlbrum advertng revenue wll be contant n. Thu, ncreang wtcher wll not account for declnng ad revenue n the no trackng cae unle there ome aymmetry (partcularly n readerhp hare). Aymmetry omethng Bergemann and Bonatt (00) aume and they demontrate that addng more outlet wth ncreang aymmetrc readerhp hare can ncreae total advertng revenue by vrtue of
4 facltatng mproved targetng. They aume, however, that all conumer read one outlet whle ome alo wtch to other outlet. Thu, there a herarchy n readerhp preference. In our ettng, when there are aymmetre pecfcally when the upply of ad capacty l on outlet, ( )a, dffer wtchng can have an mpact on prce and proft. Propoton. Suppoe that p > p. Then outlet ( ) proft are ncreang (decreang) n ρ and all adverter have a potve demand for mpreon on outlet. The proof of the propoton n the appendx. Intutvely, a the hare of wtcher grow, adverter are ncreangly dfferent a to whch outlet they place mpreon on. Hence, the relatve demand for outlet mpreon grow compared wth outlet. 4 Perfect Trackng 4. The Adverter lemma When there are no wtchng conumer, an adverter who place an ad on one outlet mpree thoe conumer only and one that place ad on multple outlet, mpree all of the conumer of thoe outlet. Importantly, none of thoe mpreon wated and no conumer on an outlet med. Conequently, ave for any hortfall n ad capacty, all adverter multhome. 5 When conumer wtch between outlet, adverter, n general, face a dlemma. If adverter mult-home, they acce all of the loyal conumer on each outlet but they 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. The adverter then face a trade-off. If adverter mult-home, they mpre all of the loyal but pay 5 If ad capacte dffer between outlet, then, by defnton, there mut ext ome adverter who do not multhome.
5 for ome wated mpreon on wtcher. Moreover, they are not necearly guaranteed mpreng all wtcher by th trategy. Some adverter may then prefer to ngle-home; acrfcng loyal on another outlet but not watng any mpreon. Other adverter may decde to ncreae 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. Intead, there nothng n the two perod tructure that requre uch ynchronzaton. Conequently, we aume that coordnaton of mpreon n a gven perod of tme wll not reolve the adverter dlemma. The adverter dlemma are when outlet cannot ealy track conumer a they move acro outlet. Indeed, n ome tuaton outlet may face dffculte n trackng conumer wthn an outlet. We wll explore the prece nature of th below. Frt, however, t ntructve to conder cae where there are wtchng conumer but where the med/wated mpreon problem doe not are. Th wll allow u to conder the mpact of a technologcal benchmark on the effcency of advertng market and competton wthn them. 4. Perfect ad-trackng The adverter dlemma are becaue, when an adverter purchae mpreon, they cannot tell whether thoe mpreon wll be placed n front of unque conumer or not. Here we magne a technology the element of whch currently ext (at leat onlne) but the mplementaton far from achevng deal workng whereby conumer can be tracked both
6 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. 6 Thu, there are nether wated mpreon nor med mpreon. We term th perfect ad-trackng, a the advertng platform (or broker or exchange) able to track conumer acro web-te and control the ad they ee n a gven perod of tme. Here, we aume that th ervce provded compettvely and we aume that adverter pay only for an mpreon. Th too a heroc aumpton that we relax n a later ecton. A noted earler, there are I I( I ) type of conumer; I who ngle-home on a gven outlet and the remander who wtch between two outlet. Perfect ad-trackng mean that each conumer can be tracked and o the platform can charge adverter for acce to that conumer. That, the platform can prce dcrmnate baed on conumer-type. We aume n th ecton that the outlet chooe a ngle level of ad capacty for all conumer, and ell thoe mpreon ung the ad platform. 7 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 6 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. 7 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.
7 capacte for dfferent type. 8 Th addtonal flexblty would lead to a cenaro wth eentally dtnct market, o that frm compete a la Cournot for wtcher and et monopoly output for loyal uer; we omt the formal analy of th cae. For ntance, a conumer ngle-homng on 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. 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 ) = a a. Note that th allocaton correpond to the frt-bet j j allocaton. Note alo that th mple that, f a = a j, then p pj pj = =. In contrat, f a > a j, then p < pj < pj. It ueful to emphaze here that competton between outlet over adverter for multhomng conumer lmted by the number of attenton perod. In th repect, when the advertng platform dtnguhe between wtcher movng between outlet, the number of advertng mpreon t can ell lmted to the capacte of thoe two outlet. If there were more attenton perod, then for ome wtcher who travere more outlet advertng capacty wll be uppled by a greater number of outlet. A we oberve below, when advertng capacty endogenou, th wll drve more competton between outlet n the provon of uch capacty. In a gven perod, outlet receve all of t loyal conumer, l, and half of the wtcher between t and a gven outlet j, j. Gven th pecfcaton, outlet proft are: 8 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.
8 l π = Pa ( aj) a j P( a)a (7) j Examnng th proft functon, t eay to ee that an ncreae n ρ caue a greater hare of conumer to become wtcher. An outlet wll beneft from th change f they earn more, on average, from wtcher than from loyal conumer;.e., f and only f: ( ) Pa ( aj) P( a) xj > 0 (8) j In partcular, an outlet wth a hgh capacty relatve to other outlet that have a relatvely large readerhp hare wll become more proftable a a greater number of conumer become multhomer. The oppote the cae for an outlet wth relatvely low advertng capacty. Th nght lead to the followng reult. Propoton. Let advertng capacty be exogenou. For an outlet wth a max a j j ( a mn j aj), π non-decreang (non-ncreang) n ρ. If all outlet have equal advertng capacte, then π doe not change wth ρ for all. The reult due to an externalty that the hgh capacty outlet exert on the low capacty one through p j. A ρ ncreae, the low capacty outlet loe ther mot valuable reader n favor of the hgh capacty one and vce vera. Snce the only mpact of wtchng to change the total capacty of ad a conumer ee, f all outlet have the ame capacty, clearly wtchng ha no mpact when capacty exogenou. It then traghtforward to compare the proft acheved under perfect ad-trackng wth thoe that are n the benchmark cae wth ngle-homng conumer. Propoton 3. Suppoe that ad capacty exogenou. If ρ = 0 and/or a = a for all, then expected outlet proft under perfect ad trackng the ame a the benchmark cae wth nglehomng conumer. Otherwe, there ext, under perfect ad-trackng, at leat one outlet whoe proft wll be hgher and one whoe proft wll be lower than the benchmark cae.
9 Note that when ρ = 0, there are no wtcher and proft n (7) equal π = x P( a )a, the proft n the benchmark cae. Smlarly, f a l ( j ) = a, then (7) become π = P( a) a = xp( a)a. Intutvely, when there no wtchng and no ad j trackng, an outlet earn revenue for each reader t attract and can dvde that revenue between the two attenton perod. When there perfect ad-trackng, the ame can be acheved a the outlet pad per reader attracted per perod. A the expected attenton the outlet receved the ame n both cae (that, x unt), ther proft are the ame. The fnal reult a drect corollary of Propoton. Importantly, relatve proft are not drven by dfference of relatve market hare. That, wth ymmetrc ad capacte, proft are proportonal to x. Thu, acquton of an addtonal unt of readerhp hare by an outlet tranfer the proft aocated wth that reader drectly from another outlet, and the margnal acquton value of a reader P( a)a regardle of how many reader an outlet already ha. Aumng an exogenou level of ad capacty, th precely the ame acquton ncentve that outlet n the cae where conumer ngle home. 4.3 Endogenou capacty choce The prevou reult hghlght the mportance of relatve advertng capacty n determnng whch outlet may gan from the Internet n the future. We now endogenze capacty choce, o that outlet can commt to maller capacty level than could be potentally uppled, focung on how t relate to both readerhp hare and the hare of mult-homng conumer. Oberve that the choce here for outlet capacty per conumer per unt of attenton. We do not allow outlet to ell dfferent quantte of advertng to dfferent type of conumer.
0 We aume that there are only two outlet to focu on the mpact of outlet aymmetry. 9 Th mean that an outlet wll face demand for two et of conumer one et that t ha monopoly control over and the other for whch t compete wth t rval a la Cournot. We now conder an analy of the comparatve tatc of competton n th et-up. We can wrte proft a a functon of capacty, readerhp hare and ρ: l π ( a, a ; x, ρ) = P( a a ) a ( x, x, ρ) P( a ) a ( x, ρ) j j j Let M MR ( a, a ) = ( ap ( a ) P( a )) and MR ( a ) ( ap ( a ) P( a )) T T T =. The frtorder condton for outlet mply: M l MR ( a, a a ) ( x, x, ρ) MR ( a ) ( x, ρ) = 0. j j j Th how that the outlet conder the relatve proporton of wtcher and loyal when choong output, and t wll elect capacty o that one of the margnal revenue term potve whle the other negatve. Note that f a > a, then f P decreang and concave, j M MR ( a, a a ) < 0 mple that MR ( a ) < 0. Thu, for the outlet wth the larger equlbrum j capacty, we mut have MR ( a, a a ) 0 n equlbrum: capacty choen lower than the j Cournot bet repone, but hgher than the monopoly level for that outlet. The convere not necearly true, however; the outlet wth mall equlbrum capacty may alo have MR ( a, a a ) 0 (and ndeed, th hold n the cae of unformly dtrbuted adverter j valuaton). The mpact of an ncreaed readerhp hare on the ncentve to expand capacty : π = MR ( a, a a ) ( x, x, ρ) MR ( a ) ( x, ρ) M l a x j x j x M = MR ( a, a a ) ρ( x ) MR ( a )( ρ x ρ) j 9 All of the qualtatve predcton n th ubecton apply for a general F(.) aumed to be log-concave. (Proof avalable from the author).
At an equlbrum choce of capacty, the rato of the margnal revenue term equal to the rato of wtcher to loyal uer, o that we wll have (where aˆ the equlbrum capacty for ): ( x, x, ρ) π (, ) (,, ρ) (, ρ) j j l ˆ ˆ ˆ a x = MR (, ) ( ˆ, ˆ a a a j ) x j x x l x x a aj a a = j ( x, ρ) xρ = MR ( ˆ, ˆ ˆ a a a j) ρ( x) ( x ) ρ Snce hgher readerhp hare ncreae the proporton of loyal uer, t drect effect on capacty negatve f and only f MR ( aˆ, aˆ aˆ ) 0. Intutvely, becomng larger caue a frm to put j more weght on loyal uer, gvng t the ncentve to reduce output. However, clear equlbrum comparatve tatc are complcated by the fact that Cournot output are trategc ubttute. We can alo conder the mpact of wtchng on capacty choce: π = MR ( a, a a ) ( x, x, ρ) MR ( a ) ( x, ρ) M l a ρ j ρ j ρ M = MR ( a, a a ) x ( x ) MR ( a ) x ( x ) j At an equlbrum capacty choce, we wll have π ρ( x ) = MR ( aˆ, aˆ aˆ ) x ( x ) ρ( x ) a ρ ( a, aj) = ( aˆ, aˆj) j So long a wtchng not too prevalent and outlet are not too aymmetrc, wtchng decreae the hare of loyal uer, o that the drect effect of wtchng on capacty potve f and only f MR ( aˆ, aˆ aˆ )( ρ( x )) 0. Thu, the drect effect unambguouly potve for the j outlet wth the larger hare. Ung the envelope theorem, we can wrte the mpact of ρ on proft a follow:
d d ρ π ρ ρ ρ = ρ ρ * * * * * * ( a ( x, ), aj( x, ); x, ) P ( a aj) aj( x, x, ) ρ aj( x, ) * * * * * l Pa ( aj) a ρ j( x, x, ρ) P( a ) a ρ ( x, ρ) * * * * = P ( a aj) aj( x, x, ρ) ρ aj( x, ρ) * * * * * Pa ( aj) ax ( x) P(a ) ax ( x) Swtchng ha an ndrect effect through ncreang the opponent output, whch (f t ncreae opponent capacty) lower prce and thu proft. It alo ha a drect effect of ncreang the proporton of wtcher and decreang the proporton of loyal. The um of the lat two term negatve f and only f a * a * : for the lower-capacty outlet, wtcher are le proftable. The j analy for the outlet wth the hgher equlbrum output appear ambguou f t compettor output ncreang n ρ, a the prce effect and the wtcher/loyal effect move n oppote drecton. Summarzng the dcuon o far, we can gan ome ntuton about the drect effect of parameter change on outlet capacty choce and proft, but ome addtonal tructure on demand requred to obtan unambguou comparatve tatc reult. To do o, we focu on the cae of lnear demand (unformly dtrbuted adverter valuaton). The followng propoton demontrate that the larger outlet wll provde the lowet advertng capacty. Propoton 4. Suppoe that there are two outlet and that F ( v) v. = Equlbrum advertng for each outlet, a ˆ are non-ncreang n readerhp hare, x. Equlbrum advertng aˆ nondecreang n ρ f x ( 49) / 6.87 or ρ ( / 3)(3 3).84. Total ad capacty, aˆ ˆ aj, non-decreang n ρ. For uffcently ymmetrc frm (.33 x.67 ), proft of both frm are decreang n ρ, whle for uffcently aymmetrc frm, proft are decreang PT PT PT PT (ncreang) n ρ for x > ( < ) x j. π / x < π j / x j when x > x j. π π j decreang n ρ for x > x. j PROOF: Solvng for the unque Nah equlbrum wth the unform dtrbuton we have: l l l l 6 j 6 j 4 aˆ = (9) l l l l 64 6( ) 3 j j
3 π (4 )(6 6 4 ) l l l l l PT j j = l l l l (64 j 6( j ) 3 ) (0) The ret of the propoton follow from manpulatng thee expreon. We have already developed ome ntuton for thee reult, but the unform dtrbuton gve u more defntve concluon. Conder the comparatve tatc of wtchng on proft. The ncreae n capacty of an opponent outlet ha a negatve mpact on each outlet. However, the ncreae n the hare of wtcher ha a potve (rep. negatve) effect on the maller (larger) outlet, a the hare of conumer comng from the wtcher goe up. Swtcher are more (le) proftable than loyal for the maller (larger) outlet, becaue the larger outlet erve le capacty than the maller outlet. Wth the unform dtrbuton, for the mall outlet the latter effect domnate the negatve effect of ncreae n capacty and mall outlet proft go up. Note that wtchng alo affect the mpact of an ncreae n readerhp hare on proft. Under the benchmark ngle-homng conumer cae, more reader mply mproved proft n a PT lnear fahon; that π / x wa ndependent of x. Wth perfect trackng, an addtonal reader attracted from a rval outlet not only caue an outlet to retrct advertng capacty but for that capacty to ncreae elewhere (nce capacte are trategc ubttute n our Cournot etup), decreang mpreon prce for wtcher. Thu, outlet wth a lower readerhp hare have a hgher ncentve to attract margnal reader. It alo ueful to note that f the two outlet were commonly owned, ther owner would maxmze jont outlet proft by ettng a = a =. By Propoton, n th cae, realzed 4 proft n th cae wll be the ame a thoe generated when there are no wtcher. Thu, under perfect trackng wth > 0 there wll be an ncentve for outlet to merge.
4 In the abence of common ownerhp, mult-homng conumer caue outlet to compete for adverter and a greater proporton of them ncreae avalable advertng pace and decreae overall proft. However, the queton of nteret what th doe to the margnal ncentve to attract an addtonal reader at the expene of rval. What we can demontrate that PT x NS x π π a x 0 or x, then > =. It ueful to note that f both outlet are commonly 4 owned (.e., n a monopoly), then proft under perfect trackng are the ame a proft earned for each outlet n the no wtchng cae. Thu, competton the ource of any reducton n proft a a reult of wtchng but th competton can, n turn, promote hgher ncentve to attract readerhp when there are aymmetrc readerhp hare. 5 Imperfect Trackng A dcued n the ntroducton, one of the prmary beneft of the Internet for the new meda ndutry to utlze trackng technology to enure that there a tghter match between adverter and reader. Here we conder the equlbrum n the advertng market and the potental for competton amongt outlet when uch trackng mperfect and not at all poble acro outlet. 5. Trackng technologe There are dtnct technologe that mght be employed by outlet to trackng conumer nternally. Here we decrbe thoe technologe and dentfy ther common charactertc. Content-Baed Impreon: We begn to look at trackng wth content-baed mpreon. Th the ba mot commonly aocated wth offlne content. That, prnt newpaper agree to place an adverter ad on a partcular page aocated wth a gven pece of content. Thu, all conumer readng that content vew the ad. In the onlne world, the dea here that an
5 adverter can bd for an mpreon ted to an tem of content but cannot pecfy the content telf. That ablty lmt potental wated mpreon a t can be aumed that a conumer wll vew a pece of content only once. Nonethele, adverter mght want to ncreae ther number of mpreon (that, the number of dfferent content pece) on outlet a thee wll ncreae the number of wtcher the adverter lkely to mpre. Th repetton, however, come at the cot of wated mpreon on loyal conumer. In order to reach a greater hare of wtcher, adverter need to purchae more mpreon on a greater range of content. Specfcally, f an adverter pay for n mpreon, t wll ht ( ) wtcher. Table tate the expected adverter urplu for fve poble n choce. Interetngly, lke no trackng, th the ame regardle of whch outlet thoe mpreon appear on. Conequently, f you want to ncreae the probablty of mpreng a wtcher, t better to place an addtonal mpreon on the outlet wth the lower number of loyal conumer a that determne the volume of mpreon that are wated but you tll have to pay for. Th fact make t dffcult to characterze and etablh the equlbrum n the market. Specfcally, the jut excluded adverter n the market wll be an adverter who wll want to ngle home on one outlet. Th the ame for both outlet and o long a ad capacte are not too dfferent acro outlet, th wll drve a common mpreon prce, p, acro outlet. The problem that, gven th common prce, mult-homer wth more than one mpreon on each outlet wll want to purchae addtonal mpreon on the maller outlet (wth the lowet l ). Thu, n equlbrum, thoe addtonal purchae hould be concentrated there. However, t far from clear that there would ext a ngle market clearng prce under that condton. Table : Expected Adverter Surplu under Imperfect Trackng
6 Frequency-Baed Trackng: Whle placng mpreon n aocaton wth content can enure that ome mpreon are not wated, there clearly a game beng played n targetng wtchng conumer. It can be magned that the number of pece of content exceed the rate at whch conumer mght wtch between te here a maxmum of one tme. Intead, we can magne that outlet can offer to place mpreon baed on frequency. That, an adverter bd for a frequency of mpreon on a gven outlet ether one or two per attenton perod. If an Adverter Choce Content-Baed Trackng Frequency-Baed Internal Trackng Trackng Sngle home on, l l l ( )( v p) ( )( v p) ( )( ) v p mpreon l 3 l l l l Sngle home on, ( ) v ( ) 4 p ( ) v ( ) p ( )( v p) mpreon l l Mult-home, 3 l l 3 l l 3 ( ) v ( 4 ) v p ( 4 ) v p 4 mpreon each l l ( ) p l l Mult-home, on 7 l l 3 l l 3 ( ) v v ( 8 j ) p v ( j ) p and on j l l 3 ( ) p j l l Mult-home, 5 ( ) v ( l 6 l l l v ) p v ( ) p mpreon on l l ( ) p each adverter bd for two, that mean that all vtor to an outlet wll be expected to ee that mpreon but that loyal conumer wll ee t twce. Thu, t hare wth content-baed mpreon that there are wated mpreon on loyal conumer but, at leat for an ndvdual outlet, doe not create wated mpreon on wtcher. Of coure, a wtcher move between te, ome wate may tll occur. Table lt the expected adverter urplu. Conequently, the expected urplu an adverter receve from mult-homng le than the um of ngle homng on each outlet wth the ame number of overall mpreon. Internal trackng: Perfect trackng a platform technology that work becaue conumer are tracked acro outlet. However, what f outlet themelve could more effectvely track
7 conumer? For ntance, uppoe that outlet could determne whether a conumer wa mpreed by an adverter already and enure that they were not mpreed agan. In effect, t could enure that there were no wated mpreon on loyal conumer. For wtcher, th would not be an ue for the outlet telf but would reman an ue acro outlet. Th type of trackng currently offered by many outlet, and t known n the ndutry a frequency cappng. 0 The dea would be that adverter could apply for a greater frequency of mpreon ( rather than ) but wth the caveat that mpreon to any one conumer are capped at. In th cae, f both outlet dd th, the expected urplu to adverter dependng on ther choce would be a lted n Table. Notce that, n th cae, there are no wated mpreon on loyal conumer. Indeed, wth two mpreon on a ngle outlet, adverter have no wated mpreon. However, n order to target all conumer, adverter mut purchae mpreon on both outlet and, n th cae, they purchae ome wated mpreon. In contrat to frequency-baed mpreon, however, they can target addtonal wtcher wthout ncurrng any wated mpreon on loyal conumer. Nonethele, the wated mpreon on wtcher uffcent to generate dmnhng return to mult-homng for adverter. The fact that the margnal adverter n the market wll ngle-home due to dmnhng return to mult-homng and the fact that mult-homer, f they ext, wll be hgh value adverter tell u omethng about the reultng market equlbrum. Frt, a the next reult demontrate, mperfect trackng allow a greater quantty of adverter to acce outlet. Propoton 5. Suppoe there () exogenou and ymmetrc advertng capacty; () ρ > 0 ; and () there mperfect trackng. If, n equlbrum, adverter v = purchae no more than 0 Though ad platform mght alo offer frequency cappng acro outlet, here we focu on cappng mpreon that ndvdual conumer ee wthn an outlet.
8 one mpreon per conumer, the equlbrum number of adverter actve n the market greater than when ρ = 0. The proof a traghtforward accountng exerce. ue to dmnhng return to mult-homng that are when ρ > 0, the margnal adverter n any equlbrum a ngle-homer. A no adverter ngle-home when ρ = 0, and by the aumpton that the hghet value adverter mult-homng wth only one mpreon per conumer (a they would do when there are no wtcher), the total number of adverter purchang ad pace necearly ncreae when ρ > 0. Note, however, that a the number of mpreon are fxed (a upply fxed), th mple that mpreon prce wll be lower. When the hghet value adverter purchae more than one mpreon per conumer, the reult n Propoton 4 may not hold. A wll be demontrated below, th ha mplcaton for mpreon prcng. Put mply, a t nframargnal adverter who are mot lkely to buy multple mpreon per conumer on one or more outlet, a margnal adverter determne the market clearng prce, a the number of wtcher become large, nframargnal demand become large enough that the margnal adverter may have hgher value than when there are no wtcher. Conequently, mpreon prce may re. 5. Market Equlbrum wth Frequency-Baed Trackng Becaue the market equlbra under each type of mperfect trackng drven by mlar factor, we wll concentrate here on the equlbrum under frequency-baed trackng a th correpond to what many onlne outlet are able to provde today. n Table. There are everal mportant thng to oberve about expected adverter urplu a lted Note frt, that havng mpreon on each outlet purely wateful and can be ruled out. Conequently, the hghet number of mpreon any adverter wll purchae 3.
9 Havng two mpreon on one outlet preferable to a ngle mpreon f l ( v p) > p. Mult-homng ( mpreon) preferable to ngle-homng ( mpreon) f l l l ( j 4 ) v> ( j ) p (under ymmetrc outlet and the fact that th alway atfed) Mult-homng ( mpreon) preferable to ngle-homng ( mpreon) f ( l ) v > ( l ) p l ( v p) ( v p) > 0 j 4 j j 4 Mult-homng ( and ) preferable to ngle-homng ( mpreon) f l l v> ( ) p j j Mult-homng ( and ) preferable to mult-homng ( and ) f 4 v > ( l ) p Mult-homng ( and ) adverter wll, all other thng equal, purchae ther thrd mpreon on the outlet wth the fewet number of loyal conumer. Under ymmetry, there, therefore, a clear rankng of opton baed on adverter value. Low value adverter prefer ngle-homng, then there mult-homng ( mpreon) and then there mult-homng ( and ). The margnal mult-homng ( and ) adverter v ' = l 4 p whle the margnal mult-homng ( and ) adverter v l j l j 4 = p. The margnal adverter n the market a ngle-homer, v = p. Note that l l j l ' 0 l j 4 j 4 v > v > > (under ymmetry). There are therefore, three regme of equlbrum poble: () f v, both outlet wll only have ngle-homng adverter on them; () f v > v, there wll be mult-homng adverter on each outlet; and () f > v, there wll be mult-homng adverter (wth addtonal mpreon) on each outlet. 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: l a a ()
30 It wll often be convenent n what follow to expre varable n a per cutomer ba. In th cae, total advertng nventory on outlet a. On the demand de, for each conumer t expect to attract, an outlet receve a hare of ngle-homer ( Fv ( ) Fv ( )), an mpreon from each mult-homer ( Fv ( ) or Fv ( ) Fv ( ) a the cae may be) and a further half (under ymmetry) of mult-homer (f any) ' who have mpreon on one outlet ( Fv ( ' )). Thu, outlet demand : ( σ ( Fv ( ) Fv ( )) ( Fv ( )) ( Fv ( ' ))) )( σ ( Fv ( ) Fv ( ) ) ( Fv ( ))) ( ) > p l l f ( p () where 3 a ( F( v ' ) F( v ) ( F( v ' ))) max ( ( 3 3,0 a F v ' ) F( v ) ( F( v ' ))) aj ( F( v ' ) F( v ) ( F( v ' ))) σ = a ( F( v )) ma x a ( ( )) ( ( )),0 F v a j F v f > p p (3) That, σ 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, f thee are potve for both outlet then σ =. 5.3 Symmetrc capacte To buld ntuton, we conder, frt, the ymmetrc ad capacty cae:.e., where a = a = a. In th cae, each outlet avalable capacty auctoned on a frt prce ba. The margnal ngle-homng adverter on outlet, v, wll have a wllngne to pay for an mpreon l determned by ther expected urplu of ( )( v p ) whle the margnal mult-homng adverter n the market, v, wll have a wllngne to pay for an mpreon on outlet, determned by: