Online Business Models, Digital Ads, and User Welfare

Daron Acemoglu, Daniel Huttenlocher, Asuman Ozdaglar and James Siderius

Journal of Political Economy, 2026, vol. 134, issue 10, 3252 - 3305

Abstract: We study online platform business models where digital advertising is both informative and potentially manipulative. Sophisticated users correctly interpret ad signals, while naive users overestimate their informativeness. We characterize the platform’s profit-maximizing business model and show that advertising tends to reduce welfare for both groups. Naive users are overexposed to advertising and become too optimistic about product quality. The resulting increase in demand raises equilibrium prices for sophisticated users as well. Allowing the platform to offer multiple plans can intensify these welfare losses by separating naïfs and sophisticates. Similar results apply in the presence of firm-level and platform-level competition, because digital advertising softens competition. We conclude by showing how flat digital ad taxes can be welfare-improving.

Date: 2026
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