Contextual Advertising

41 Pages Posted: 2 Feb 2011

See all articles by Kaifu Zhang

Kaifu Zhang


Zsolt Katona

University of California, Berkeley - Haas School of Business

Date Written: February 1, 2011


This paper studies the strategic aspects of contextual advertising. Contextual advertising entails the display of relevant ads based on the content that a consumer views and exploits the possibility that consumers' content preferences are indicative of their product preferences. The results show that contextual targeting impacts advertiser profits in two ways: first, advertising through relevant content topics helps advertisers reach consumers who have strong preferences for their products. Second, heterogeneity in consumers' content preferences can be leveraged to reduce product market competition, even when consumers are relatively homogeneous in their product preferences. The intermediary offering contextual advertising has the following incentives to strategically design its content structure and its targeting precision: (1) When product market competition is high, the intermediary offers homogeneous content and increases its targeting precision. This encourages the advertisers to bid for multiple content topics in order to prevent their competitors from advertising to the consumers, potentially leading to one advertiser preempting competition by monopolizing all the advertising space. (2) When product market competition is low, the intermediary offers heterogeneous content and intentionally decreases its targeting precision. This encourages the advertisers to bid for multiple advertising slots in order to reach consumers who prefer their product.

Keywords: Contextual Advertising, Targeting, Competition, Game Theory

JEL Classification: c70, d83, m31, m37, o14

Suggested Citation

Zhang, Kaifu and Katona, Zsolt, Contextual Advertising (February 1, 2011). Available at SSRN: or

Kaifu Zhang

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex

Zsolt Katona (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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