Competition and Specificity in Market Design: Evidence from Geotargeted Advertising

Abstract

How should market designers tradeoff competition and specificity? We study a natural experiment in the release of new advertising targeting technology. The platform in our study introduced targeting into select geographic markets using a regression discontinuity. We find that advertisers use new targeting to avoid low quality ad inventory. This leads to a reduction in the growth of ad impressions. When advertisers avoid this useless inventory, they retreat into smaller, less competitive ad auctions featuring fewer competitors for available ad space. This reduction in competition lowers click prices in the treated areas. Nonetheless, the effects on platform revenue growth are positive. Better targeting improves the consumer experience of advertising. This leads to higher consumer clickthrough rates, which raises revenue by increasing the quantity of clicks sold and offsetting the decrease in prices.