The Impact of Targeting Technology on Advertising Markets and Media Competition

Abstract

This paper examines the impact of targeting technology on competition between local and general outlets. In the absence of targeting (say, of location), local outlets have an advantage in that there is a tighter match between readers and local consumers that advertisers wish to attract. Targeting restores that advantage to general outlet increasing its demand for advertising but also allows it to more efficiently allocate scarce advertising space. In a baseline case, we demonstrate that such space is the critical constraint and if it can be easily expanded then the adoption of targeting has no impact on profits or competition. We then analyze three extensions of the model in which targeting does benefit general outlets: advertising space is limited or costly; there is heterogeneity across local media markets; or advertisers are capacity-constrained (creating competition between outlets on the advertising-side of the industry). Even in these cases, however, the impact of targeting is mitigated by the fact that when targeting is introduced, it is optimal for outlets to cut back on their supply of ad space.

Keywords: advertising, targeting, media, competition

JEL Classification: L13, L82, M37