Double Marginalization and Misplacement in Online Advertising

Abstract

Internet users often surf multiple websites as a bundle to fulfill their needs and "pay" for the content by watching ads. We study how such complementary websites choose advertising policies. Two forces distort the equilibrium away from the industry optimum and the efficient outcome. First, websites place too many ads (double marginalization). Second, given the total advertising volume at equilibrium, websites misallocate ads across themselves (misplacement). Competition in one market segment may eliminate double marginalization but exacerbate misplacement. Introducing micropayments removes misplacement, but the welfare consequences are ambiguous. Policymakers thus need caution in applying the standard remedies to zero-price markets.

Keywords: Platforms, Advertising, Misplacement, Double Marginalization, Competition

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