Separating Advertising and Marketplace Functions of E-commerce Platforms: Is it Social Welfare Enhancing?

TL;DR

This paper analyzes whether separating advertising from e-commerce platforms improves social welfare, finding that such separation may benefit sellers but can harm consumers and does not necessarily enhance overall welfare.

Contribution

It provides a theoretical analysis showing that separating advertising from e-commerce platforms does not necessarily benefit social welfare, challenging regulatory assumptions.

Findings

Separating advertising can benefit sellers but may harm consumers.

Independent ad firms have less incentive to improve targeting than integrated platforms.

Separation does not necessarily lead to social welfare improvements.

Abstract

The use of sponsored product listings in prominent positions of consumer search results has made e-commerce platforms, which traditionally serve as marketplaces for third-party sellers to reach consumers, a major medium for those sellers to advertise their products. On the other hand, regulators have expressed anti-trust concerns about an e-commerce platform's integration of marketplace and advertising functions; they argue that such integration benefits the platform and sellers at the expense of consumers and society and have proposed separating the advertising function from those platforms. We show, contrary to regulators' concerns, that separating the advertising function from the e-commerce platform benefits the sellers, hurts the consumers, and does not necessarily benefit the social welfare. A key driver of our findings is that an independent advertising firm, which relies solely on advertising revenue, has same or lesser economic incentive to improve targeting precision than an e-commerce platform that also serves as the advertising medium, even if both have the same ability to target consumers. This is because an improvement in targeting precision enhances the marketplace commission by softening the price competition between sellers, but hurts the advertising revenue by softening the competition for prominent ad positions.