Pricing Power in Advertising Markets: Theory and Evidence

By: Matthew Gentzkow, Jesse M. Shapiro, Frank Yang and Ali Yurukoglu

Format:Print
| Language:English

Abstract

Existing theories of media competition imply that advertisers will pay a lower price in equilibrium to reach consumers who multi-home across competing outlets. We generalize and extend this theoretical result and test it using data from television and social media advertising. We find that television outlets whose viewers watch more television charge a lower price per impression to advertisers. This finding helps rationalize well-known stylized facts such as a premium for younger and more male audiences on television. Also consistent with the theory, we show that social media advertising markets feature a premium for older audiences. A quantitative version of our model whose only free parameter is a scale normalization can explain 35 percent of the variation in price per impression across owners of television networks, and aligns with recent trends in television advertising revenue. We use the model to quantify the impact of mergers, the effect of competition on incentives to produce content, and the effect of Netflix ad carriage on prices for linear television advertising.

Citation

Gentzkow, Matthew, Jesse M. Shapiro, Frank Yang, and Ali Yurukoglu. "Pricing Power in Advertising Markets: Theory and Evidence." NBER Working Paper Series, No. 30278, July 2022.