Platform Competition and Consumer Tracking

This paper examines the effects of tracking technologies on competition between digital platforms that generate revenue from both advertisers and readers in a two-sided market. Digital platforms sell audiences to advertisers, but the willingness to pay for reaching a consumer with an ad depends on whether he or she has already seen the ad elsewhere. High-value consumers are those who have not seen a specific ad before, while low-value consumers have. Tracking technologies can be utilized to distinguish between these consumer types. Our findings suggest that tracking might escalate competition among platforms in the consumer market to such an extent that it makes the platforms worse off, despite higher profits from advertising. The intense competition for consumers reduces consumer prices, leading more consumers to visit multiple media platforms compared to scenarios without tracking. This outcome could be beneficial from a policy perspective. Paradoxically, an increased valuation of low-value consumers might reduce overall platform profits, regardless of whether tracking is implemented.