Platform Design in Targeted Advertising

Firms compete for slots on an ad-financed platform by paying the platform to display their ads. In its design, the platform decides on its ``matching quality'' by choosing how much weight to give to each firm’s payment while taking into account consumers’ preferences. Increasing the quality makes the platform more desirable to the consumers, but also decreases its ad revenue per consumer, since it softens competition for exposure among firms. In the optimal design, the platform actively mismatches (matches) the firm with high (low) profit per match by decreasing (increasing) the weight that its payment carries. When consumers’ favorite firm enjoys a higher profit per match than its rival, a neutral policy in which the platform does not influence matching, improves consumer welfare. The platform is welfare enhancing however, when the consumers’ preferred firm earns little per match.Moreover, better information about consumer tastes improves consumer welfare because the platform mismatches the better firm less often