Double Marginalization and Misplacement in Online Advertising

Abstract

Internet users often visit multiple ad-financed websites as a bundle to fulfill their needs. We ask whether complementary websites have the right incentives to choose their advertising policies. We identify two forces that distort equilibrium away from the industry optimum and the efficient outcome. First, websites place more ads than the industry optimum (double marginalization). Second, given the total advertising volume at equilibrium, websites misallocate ads across websites (misplacement). Perfect competition in one market segment eliminates double marginalization but may exacerbate misplacement. The potential trade-off challenges conventional wisdom that competition would restore the industry optimum. Introducing micropayments removes misplacement, but the welfare consequences are ambiguous.