How Do Digital Advertising Auctions Impact Product Prices?

Dirk Bergemann, Alessandro Bonatti and Nicholas Wu

The Review of Economic Studies, 2025, vol. 92, issue 4, 2330-2358

Abstract: We present a model of digital advertising with three key features: (1) advertisers can reach consumers on and off a platform, (2) additional data enhances the value of advertiser–consumer matches, and (3) the allocation of advertisements follows an auction-like mechanism. We contrast data-augmented auctions, which leverage the platform’s data advantage to improve match quality, with managed-campaign mechanisms that automate match formation and price-setting. The platform-optimal mechanism is a managed campaign that conditions the on-platform prices for sponsored products on the off-platform prices set by all advertisers. This mechanism yields the efficient on-platform allocation but inefficiently high off-platform product prices. It attains the vertical integration profit for the platform and the advertisers, and it increases off-platform product prices while decreasing consumer surplus, relative to data-augmented auctions.

Keywords: Data; Advertising; Competition; Digital platforms; Auctions; Automated bidding; Managed advertising campaigns; Matching; Price discrimination (search for similar items in EconPapers)
Date: 2025
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