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Online Business Models, Digital Ads, and User Welfare

Author

Listed:
  • Daron Acemoglu
  • Daniel Huttenlocher
  • Asuman Ozdaglar
  • James Siderius

Abstract

We present a model where social media platforms offer plans that intermix entertaining content with digital advertising (“ads”). Users derive utility from entertainment and learn about their valuation for a product from ads. While some users are fully rational, others naïvely perceive digital ads as more informative than they actually are. We characterize the profit-maximizing business model of the platform and show that welfare is lower when the platform monetizes through advertising instead of subscription both for naïfs (because they are targeted by intense digital advertising, which makes them over-optimistic about product quality and over-purchase the product) and for sophisticates (because the inflated demand from naïfs increases the firm’s price). This negative welfare effect is intensified when the platform can offer mixed business models that separate the naïve and sophisticated users into different plans. Our results are robust to firm-level and platform-level competition, because digital ads soften competition between both firms and platforms. We also show how digital ad taxes can improve welfare.

Suggested Citation

  • Daron Acemoglu & Daniel Huttenlocher & Asuman Ozdaglar & James Siderius, 2024. "Online Business Models, Digital Ads, and User Welfare," NBER Working Papers 33017, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33017
    Note: EH IO PE PR
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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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