“The Welfare Implications of Online Media Business Models”

Abstract: We present a model of digital advertising where users on a media platform (e.g., YouTube) consume both entertainment and advertisements (ads), which provide information about their preferences for a product. The platform chooses a business model that could allow a firm to advertise its product, and consumers make strategic choices about how much time to spend on the platform and how much of the product to buy. Our first main result shows that consumer welfare unambiguously decreases when the platform is monetized by digital ads, despite the information consumers gain from watching ads. Using this as motivation, we consider the impact of anti-trust regulation, with firm-level and platform-level competition as a potential corrective measure. Our second main set of results proves that competition can further decrease consumer welfare, because it might intensify platform incentives to target ads at susceptible populations who are most influenced. We conclude by recommending a solution directly addressing the heart of the problem, a digital advertising tax, which, if implemented well, will encourage platforms to switch from ad-based business models to subscription-based ones.