Social Media Advertising Loads as Prices

Most digital platforms are funded through advertising rather than direct payments. Why? The paper presented in this Mannheim Applied Seminar argues that three main factors could explain this prevalence: users are more sensitive to monetary prices than to ad loads, microtargeting improves the match quality between users and ads, and platforms can personalize ad loads and thus price discriminate. The authors conduct a field experiment on Facebook with 1,810 users who install a browser extension that hides nearly all ads or replaces microtargeted ads with untargeted ones. They find that hiding 82% of ads increases time on the platform by only 6%, showing that users are highly insensitive to ad loads. Removing targeting sharply reduces ad clicks and long-run engagement, indicating that targeting increases the match quality between users and ads. Finally, two-thirds of ad-load variation occurs across users, consistent with ad-load discrimination. Counterfactual simulations indicate that an ad-funded model performs at least as well as a subscription model in terms of profits and delivers higher consumer surplus. The key mechanism is that users are much less sensitive to ad loads than to monetary prices, making advertising a relatively efficient revenue source.