Value Creation by Ad-Funded Platforms

Abstract

We identify features of interactions on online platforms that make an ad-funded business model attractive for the platform, but also for consumers. We then show that ad-funded platforms heavily rely on data for their ability to create value for their users. Formally, we show that data restrictions may trigger a switch away from ad-funded to fee-funded model, resulting in a loss of consumer welfare. We also argue that restricting the effort to increase data quality weakens competition to the detriment of consumers.

Keywords: ad-funded business model, data aggregation restrictions, targeted advertising, platform competition, merchant competition, transaction costs

JEL Classification: K210, L220, L400, M370