The Attention Economy of Online Advertising

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 face an interesting tradeoff: on the one hand, they are prone to over-advertise (similar to double marginalization); on the other hand, they tend to misallocate ads across sites (a distortion we call misplacement). Standard solutions to the double marginalization problem, such as adding competition among certain sites, make the misplacement problem more severe. This tradeoff is important for news aggregators and social networks, as it affects their decisions whether to link to external content providers or to expand the amount of content they offer by themselves. Understanding these incentives helps to inform the current debate regarding the concentration of influence among a small set of online platforms.

Keywords: Platforms, Advertising, Misplacement, Market Power

JEL Classification: D21, D40, L23, L42, L86, M37