| Published: | January 22, 2010 |
| Paper Released: | January 2010 |
| Authors: | Itai Ashlagi, Benjamin G. Edelman, and Hoan Soo Lee |
Executive Summary:
Joining ad platforms can attract substantial regulatory attention: In November 2008, the Department of Justice planned to file antitrust charges to stop the proposed Google-Yahoo transaction. More recently, in September 2009, the Department of Justice sought additional information from Microsoft and Yahoo about their proposed partnership. At first glance it might seem paradoxical to claim that the Google-Yahoo transaction is undesirable, for advertisers and for the economy as a whole, while the Microsoft-Yahoo transaction offers net benefits. But that conclusion is entirely possible. HBS professor Benjamin G. Edelman and doctoral candidates Itai Ashlagi and Hoan Soo Lee explore competition among ad platforms that offer search engine advertising services. In addition, the authors evaluate possible transactions among ad platforms—building tools to predict which transactions improve welfare and which impede it. Key concepts include:
- Participation costs exist and matter, affecting bidders’ decisions about which ad platforms to use, and changing the welfare consequences of mergers or joins among platforms.
- By creating a joined ad platform of larger size than Microsoft or Yahoo alone, the transaction lets advertisers spread participation costs over a larger purchase, making it worthwhile for small to midsize advertisers to sign up with the joined Microsoft-Yahoo platform even though they do not use Microsoft or Yahoo separately.
- Preventing a competing platform from attracting advertisers reduces the quality of that competing platform (fewer ads yielding an inferior match with users’ searches), cuts that platform’s revenue (impeding future investment), and generally hinders that platform’s efforts at growth.
Abstract
We model competing auctions for online advertising, with attention to the participation costs that limit advertisers’ interest in using small ad platforms. When participation costs are large relative to the volume of traffic an ad platform can offer, an advertiser may forego use of an ad platform that the advertiser otherwise finds profitable. Mergers between ad platforms can increase advertiser welfare if the resulting click-through rate and volume of traffic are sufficiently improved relative to the offerings of the ad auctions when separate. When there is an insufficient improvement, such mergers can harm advertisers.
9 pages.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: January 2010
- HBS Working Paper Number: 10-055
- Faculty Unit: Negotiation, Organizations & Markets
