The internet has become a major avenue for advertising, toppling down other traditional media such as TV and newspapers. Newspaper ads, in particular, have shown significant drops in annual revenues over the years because of competition from internet advertising. According to many, the unique feature of the internet is its ability to give out information to a targeted audience. This is the summary of the paper by Dirk Bergemann and Alessandro Bonatti, and it is all about investigating the role of targeting in ad allocation across different media, and the equilibrium price for advertising. You can get the PDF of the behavioral targeting article here: Targeting in Ad Markets
A model to compare old and new media
This study aims to create a model which compares the new and traditional media. The model created in this study is one that involves a lot of markets (media) and products (advertisers), and a variety of buyers distributed across the media markets. The changes in targeting technology are systematically analyzed, and advertising and product markets of various sizes are ranked using a hierarchical structure. Particularly, the tension between value extraction and competition is being investigated. This tension is investigated extensively because it is believed that this is the main issue regarding the continuing improvement of targeting among all media involved.
Value Extraction
In the first part of this study, it was assumed that the consumers are distributed across all advertising markets through an exponential distribution. As the distribution gets bigger, a match between advertising and consumer increases, and as a result, social welfare increases because advertisers have a higher chance of reaching the kind of audience they want. At first, one would think that this implies that the equilibrium advertising prices will improve as well. However, this study shows otherwise, because another factor interplayed. This factor is a weaker competition as the concentration of consumers increased. What this weak competition does is that it lets advertisers focus on a few markets and neglect the other markets. The advertising value may have increased, but the advertising price has declined because of this.
Competition
The second part of this study discusses the competition for consumer attention among advertising markets. In this model, an advertiser can use two different media to send his/her message to a consumer. Competition between two offline media and an offline vs online media is then investigated. For the first scenario, it has been shown that the equilibrium prices of the two media are equalized, and advertisements are assigned on different media based on the total supply. On the other hand, competition between online and offline media is more complicated, because each of the two media must compete for every advertiser. This study finds that because of online media’s advertising capabilities such as attribute and behavioral targeting, competition with offline media will lower the latter’s price of advertisement, but even more so, for large capacity online medium, it will lower the offline media revenue more than a competition with another offline medium would.