Double Marginalization: PH+PS > P

The Attention Economy of Search and Web Advertisement

Alexander White Toulouse School of Economics, Télécom ParisTech (joint with Kamal Jain, Microsoft Research)

June 12, 2010 IESE, Barcelona Conference on the Economics of Advertising and Marketing People Surf the Web 1. Search Engine Results Page

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Hardware

Software P H PS Single Demand

* Double Marginalization: PH+PS > P

• Cournot 1838, ch. IX Typical Solutions: One Price Setter

P = P* Single Demand With advertisement, however, there are two effects at play • Different websites have different advertising technologies The Model: Simple Example

Search Engine Profits: as × [# of users]

Content Website Profits: aw × [# of users]

User utility:

2 ⎧ 2 ⎛ aw ⎞ ⎪vi − as − ⎜ ⎟ , if searches and visits website ui = ⎨ ⎝ γ ⎠ ⎪ ⎩0, otherwise

vi ~ U[0,v ] Compare Two Scenarios

Case 1 • One Search Engine Search Content • One Content Website Engine Website

Case 2 • One Search Engine • Perfectly Competitive Search Content Websites Engine Content Websites Case 1: One SE, One CW

Timing 1. SE and CW set advertising levels 2. Users decide whether to search and visit content site

Choosing Advertising Levels—SE and CW solve:

2 2 ⎡ 2 ⎛ aw ⎞ ⎤ ⎡ 2 ⎛ aw ⎞ ⎤ ⎢ as + ⎜ ⎟ ⎥ ⎢ as + ⎜ ⎟ ⎥ ⎢ ⎝ γ ⎠ ⎥ ⎢ ⎝ γ ⎠ ⎥ maxas 1− maxaw 1− as ⎣⎢ v ⎦⎥ aw ⎣⎢ v ⎦⎥

(Same Users) Case 2: One SE, Competitive CWs

Here, only search engine sets positive advertising

Choosing Advertising Levels—SE solves:

2 ⎡ 2 ⎛ 0 ⎞ ⎤ ⎢ as + ⎜ ⎟ ⎥ ⎢ ⎝ γ ⎠ ⎥ maxas 1− as ⎣⎢ v ⎦⎥ Tradeoff: Double Marginalization versus Mis-marginalization

Total Profits

Competitive Content Websites One Content Website

0.8 • With one SE, one CW,

0.7 total advertising level

0.6 unprofitably high

0.5 •With competitive CWs, only SE’s advertising 0.4 technology is utilized

0.5 1.0 1.5 2.0 2.5 γ Tradeoff: Double Marginalization versus Mis-marginalization

Total Welfare

Competitive Content Websites One Content Website

3.5

3.0 v large

2.5

2.0

1.5 1.0 v small 0.5

0.5 1.0 1.5 2.0 2.5 3.0 γ In the Paper

General, price theoretic treatment of the problem

• Start off with one site, examine different advertising technologies

⎪⎧vi −δ(a,γ ), if visits site Ui = ⎨ ⎩⎪χ, if not

Π = (a − c)D(δ(a,γ ) + χ) In the Paper

General, price theoretic treatment of the problem

• Start off with one site, examine different advertising technologies

!a" '' large !a" '' small !(a," ) !(a," )

a a In the Paper

General, price theoretic treatment of the problem

• Start off with one site, examine different advertising technologies

2.0

1.5

1.0

0.5

0.2 0.4 0.6 0.8 1.0 1.2 In the Paper

General, price theoretic treatment of the problem

Industry Optimum: 1 aΠ − c = h(δ (aΠ )) , for all j ∂δ ∂a j

Equilibrium: ⎛ 1 1 ⎞ a* − c = h(δ (a* )) + ...+ ⎜ ∂δ ∂δ ⎟ ⎜ ⎟ ⎜ ⎟ ⎝ ∂a1 ∂an ⎠ In the Paper

General, price theoretic treatment of the problem

• Start off with one site, examine different advertising technologies • Analyze problem with arbitrary number of sites • Two fundamental distortions • Double marginalization • Mis-marginalization • Salop model: 1 search engine, n content websites • Study effects of differentiation, incentives for entry • Surprising result: In equilibrium, users benefit from more differentiation/ less entry by content websites Future Work

• Relate to ongoing work on general framework of platform competition (with Glen Weyl) •Integrate constraints on transferability of utility between platforms and consumers

• Better understand relation to Cournot with asymmetric costs Partial Complementarity

Content

aw as + aw Direct Visitors Searchers

Searcher benefit direct visitors, and direct visitors harm searchers Unreliable Content Sites

2 2 λvi − as − aw ,1

1 2

2 2 2 (1− λ)λvi − as − aw ,1 − aw ,2 Related Literature

• Search and the Greater Web: • Evans (RNE ’08), Survey—“The Economics of Online Advertising” • Katona & Sarvary (Marketing Science ‘08) • Dellarocas & Rand • Search Engine as a Platform • Athey-Ellison, Gomes • White •Advertising on Platforms: • Anderson & Coate (RES ’05), Anderson & De Palma • Choi (IEP ’06) • Crampes, Hartichbalet & Jullien (JIE ’09) • Competition Among Complement Producers: • Casadesus-Masanell, Nalebuff & Yoffie • Cheng & Nahm (RJE ‘07) • Weyl-Fabinger Conclusion

1. Multiple websites are often complements 2. They use very different methods to turn user attention into revenue

Each of these leads to a separate coordination problem

1. Double Marginalization: too much nuisance 2. Mis-marginalization: inefficient nuisance

For websites, there is a tradeoff between solving one and solving the other