Sponsored Content Advertising in a Two-Sided Market

Abstract

Sponsored content advertising, also known as native advertising, is a new ad format in which a brand’s content takes the same form and qualities of the publisher’s original content. Although many advertisers have largely embraced this new advertising format, consumers seem to react negatively toward sponsored content ads. In this paper, we present an analytical model that studies the strategic role of sponsored content advertising in a two-sided media market. We identify conditions under which competing platforms would choose sponsored content advertising over traditional advertising. Despite consumers’ negative sentiment toward sponsored content ads, they can be better off together with the advertisers when both platforms choose this ad format. In fact, we show that a certain degree of consumer disliking is necessary to make both advertisers and consumers better off with sponsored content ads. However, both competing platforms offering sponsored content ads may also result in a Prisoner’s Dilemma equilibrium outcome generating suboptimal profits. We further show that two symmetric media platforms can choose different advertising strategies, leading to an asymmetric equilibrium outcome. Lastly, we analyze how the presence of multihoming advertisers as well as an incomplete ad market coverage would affect the sponsored content ad equilibrium. This paper was accepted by Juanjuan Zhang, marketing.