The Attention Economy of Online Advertisement

Abstract

Internet users often surf to multiple websites in order to accomplish a single task. When this happens, do these different sites face the right incentives when choosing their advertising policies? We build a model showing that websites are prone both to over-advertise and to misallocate ads across sites. The former problem is analogous to "double marginalization," in price-setting models, whereas the latter, novel distortion, misplacement, arises because users' attention is not fungible in the same way that money is. Moreover, we show that these two phenomena give rise to a tradeoff: adding competition among certain sites in order to eliminate double marginalization tends to worsen misplacement. Exploring a range of market structures with these features, we show that neither a third-party ad advertising agency nor payments from users to websites necessarily eliminate these distortions.

Keywords: Economics of the Internet, Search Engines, Web Advertisement, Attention, Non-transferable Utility

JEL Classification: L13, L23, D43, M37, L86