Targeted Advertising Platforms: Pooling Audiences Despite Poaching Risk

Klajdi Hoxha ()

Papers from arXiv.org

Abstract: E-commerce platforms are inviting merchants to contribute their own audiences to a common pool that the platform uses to identify and target customers most likely to click on merchants' ads. While pooling audiences allows a merchant to reach new customers, it also creates a poaching risk. We develop a model of targeted advertising, in which each customer has merchant-specific click-through rates, and study how a platform can incentivize merchants to pool audiences despite poaching risk. We characterize the mechanism that maximizes a weighted sum of platform revenue, merchants' surplus, and customer engagement, measured by expected clicks. On sufficiently large platforms, with merchants grouped by observable tags $k \in K$, the optimal mechanism offers merchants with each tag $k$ three options: (i) receive, at no charge, a campaign built on the pooled audience that delivers their baseline expected clicks, (ii) expand it by paying the posted buying price $p_k^B$ per additional click, or (iii) reduce it and receive the posted selling price $p_k^S \leq p_k^B$ per click forgone. By pooling audiences, the platform can deliver baseline clicks with potentially fewer ads by targeting the customers most likely to click, and sell any additional clicks to other merchants. We show that endogenous, tag-specific virtual prices $\{\lambda_k: k \in K\}$ pin down the posted prices and the supply of clicks across tags. We then characterize when the efficient platform design requires no outside subsidy and extend our analysis to settings in which customers who do not click may be targeted by another merchant.

Date: 2025-10, Revised 2026-10
New Economics Papers: this item is included in nep-com, nep-des, nep-ind and nep-mic
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