Incentive‐compatible advertising on nonretail platforms

Abstract

Nonretail platforms enable users to engage in noncommercial activities, while generating user information that helps ad targeting. We present a model in which the platform chooses a personalized ad‐display rule and an advertising fee (which depends on the targeted user group). The policy that maximizes the platform's advertising revenues creates an incentive for advertisers to strategize targeting. We provide a condition for incentive‐compatibility of the first‐best policy, and highlight the forces that make it harder to satisfy. We apply our result to examples of platforms. Our analysis of social networks turns out to be related to the “community‐detection” problem.