The Impact of Consumer Multi-homing on Advertising Markets and Media Competition

Abstract

We develop a model of advertising markets in an environment where consumers may switch (or “multi-home”) across publishers. Consumer switching generates inefficiency in the process of matching advertisers to consumers, because advertisers may not reach some consumers and may impress others too many times. We find that when advertisers are heterogeneous in their valuations for reaching consumers, the switching-induced inefficiency leads lower-value advertisers to advertise on a limited set of publishers, reducing the effective demand for advertising and thus depressing prices. As the share of switching consumers expands (e.g., when consumers adopt the Internet for news or increase their use of aggregators), ad prices fall. We demonstrate that increased switching creates an incentive for publishers to invest in quality as well as extend the number of unique users, because larger publishers are favored by advertisers seeking broader “reach” (more unique users) while avoiding inefficient duplication. This paper was accepted by Bruno Cassiman, business strategy.