Athey and Gans’s (2010) model demonstrates that targeting primarily allows an outlet
to reduce wasteful impressions. As long as there are no costs of these impressions, targeting
does not help an outlet to achieve higher profits. However, under many circumstances,
there are such costs. For example, in most of the models discussed above, consumers
dislike advertising. If there are nuisance costs to advertising, consumer demand is lower,
the larger the number of ads. Targeting then reduces this problem and allows the global
outlet to realize higher demand.
Athey and Gans (2010) provide other reasons for such
costs of impressions. Suppose, for example, that there is a constraint on advertising space
that prevents the global outlet from just raising its number of impressions. Targeting then
makes the use of the scarce advertising space more effective and allows the global outlet to
reap higher profits. (A similar reasoning holds for the case in which providing advertising
space is costly.) Alternatively, in the model presented above, demand across localities was
assumed to be homogeneous. However, a more realistic model would consider hetero-
geneous demand so that the global outlet has higher demand in some localities than in
others. This implies that advertisers in these localities have a higher willingness-to-pay
for advertising space. Thus, targeting allows the global outlet to price discriminate
between advertisers of different localities and obtain higher profits.
It is worth mentioning that targeting does not necessarily increase profits for the
global outlet. Consider an extension of the basic model in which outlets compete for
advertisers. This could be due to the fact that advertisers value, at most, one consumer
impression. As
Athey and Gans (2010) show, targeting can spur competition between
local and global outlets because the two types of outlets are vertically differentiated with-
out targeting. When implementing targeting, both outlets provide a similar service to
advertisers, leading to reduced prices. As a consequence, profits may fall with targeting.
Anecdotal evidence of excessively fine targeting reported by
Levin and Milgrom (2010)
supports the relevance of this result.
Athey and Gans’s (2010) model focuses on the supply side and reveals that increasing
the supply of advertising can be a substitute for targeting. Therefore, targeting is partic-
ularly effective if an outlet can increase its advertising space only by incurring a cost.
Bergemann and Bonatti (2011) pursue a different route by modeling the demand side in
a detailed way and keeping the supply side as simple as possible. In particular, they explicitly
introduce the idea that targeting on the Internet allows for unbundling of content, thereby
splitting a single advertising market into multiple ones. For example, readers of a traditional
newspaper have to buy the whole newspaper to access the content they are interested in.
Therefore, advertisers with niche products will probably find it too expensive to place an ad.
By contrast, online consumers may access (and pay for) only selected articles. This implies
that a producer of a niche product may find it profitable to pay for an ad that targets only the
consumer group interested in the particular article.
50
A similar effect holds for Internet TV.
50
This phenomenon has been called the “long tail of advertising”; see Anderson (2006). It also applies to
keyword advertising and behavioral targeting.
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Handbook of Media Economics