We present a model of digital advertising with three key features: (i) advertisers can reach consumers on and off a platform, (ii) additional data enhances the value of advertiser-consumer matches, and (iii) the allocation of advertisements follows an auction-like mechanism. We contrast data-augmented auctions, which leverage the platform’s data advantage to improve match quality, with managed-campaign mechanisms that automate match formation and price-setting.
The platform-optimal mechanism is a managed campaign that conditions the on-platform prices for sponsored products on the off-platform prices set by all advertisers. This mechanism yields the efficient on-platform allocation but inefficiently high off-platform product prices. It attains the vertical integration profit for the platform and the advertisers, and it increases off-platform product prices while decreasing consumer surplus, relative to data-augmented auctions.