Hitting the Right Target? Pricing and Advertising Strategies in Digital Markets

We investigate how a monopoly network should price advertising campaignsfor commercial firms. We assume that the network is better able to identifythe right target audience but that this requires it to learn the firm’s audiencetype. Differences in firms’ private information such as the value that they cangenerate and their own characteristics, generate some non-standard incentiveissues. We show how the network copes with these differences by alteringboth the efficiency of the targeting process and the prices charged to differenttypes of firms. Preliminary empirical evidence based on ad pricing for differentaudiences, ranging from broad to narrow targeting, confirms our predictions