COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1758R

Targeting in Advertising Markets:
Implications for Offline vs. Online Media

Dirk Bergemann and Alessandro Bonatti

March 2010
Revised August 2010

We develop a model with many advertisers (products) and many advertising markets (media). Each advertiser sells to a different segment of consumers, and each medium has a different ability to target advertising messages. We characterize the competitive equilibrium in the media markets and evaluate the implications of targeting in advertising markets.

An increase in the targeting ability leads to an increase in the total number of purchases (matches), and hence in the social value of advertising. Yet, an improved targeting ability also increases the concentration of firms advertising in each market. Surprisingly, we then find that the equilibrium price of advertisements is first increasing, then decreasing in the targeting ability.

We trace out the implications of targeting for competing media. We distinguish offline and online media by their targeting ability: low versus high. As consumers, relative exposure to online media increases, the revenues of offline media decrease, even though the price of advertising might increase.

Keywords: Targeting, Advertising, Online advertising, Sponsored search, Media markets

JEL Classification: D44, D82, D83