Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

Abstract: Abstract In this paper, we address how targeting and consumer multi-homing impact platform competition and market equilibria in two-sided markets. We analyze platforms that are financed by both advertising and subscription fees, and let them adopt a targeting technology with increasing performance in audience size: a larger audience generates more consumer data, which improves the platforms’ targeting ability and allows them to extract more ad revenues. Targeting therefore increases the importance of attracting consumers. Previous literature has shown that this could result in fierce price competition if consumers subscribe to only one platform (i.e. single-home). Surprisingly, we find that pure single-homing possibly does not constitute a Nash equilibrium. Instead, platforms might rationally set prices that induce consumers to subscribe to more than one platform (i.e. multi-home). With multi-homing, a platform’s audience size is not restricted by the number of subscribers on rival platforms. Hence, multi-homing softens the competition over consumers. We show that this might imply that equilibrium profit is higher with than without targeting, in sharp contrast to what previous literature predicts.

Keywords: Two-sided markets; digital platforms; targeted advertising; incremental pricing; consumer multi-homing.

JEL-codes: D11; D21; L13; L82

33 pages, June 10, 2021

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