Screening with Advertisements

TL;DR

This paper analyzes a seller's revenue-maximizing mechanism when selling a good alongside undesirable advertisements, using a duality framework to characterize optimal pricing strategies and the impact of third-party revenue on buyer segmentation.

Contribution

It extends the duality approach to a setting with advertisements, providing a near-characterization of optimal mechanisms and introducing tractable conditions for their analysis.

Findings

Low third-party revenue ($k$) excludes ads.

Intermediate $k$ separates ad-tolerant and ad-averse buyers.

High $k$ bundles ads for all buyer types.

Abstract

We investigate a seller's revenue-maximizing mechanism in a setting where a desirable good is sold together with an undesirable bad (e.g., advertisements) that generates third-party revenue. The buyer's private information is two-dimensional: valuation for the good and willingness to pay to avoid the bad. Following the duality framework of Daskalakis, Deckelbaum, and Tzamos (2017), whose results extend to our setting, we formulate the seller's problem using a transformed measure $\mu$ that depends on the third-party payment $k$. We provide a near-characterization for optimality of three pricing mechanisms commonly used in practice -- the Good-Only, Ad-Tiered, and Single-Bundle Posted Price -- and introduce a new class of tractable, interpretable two-dimensional orthant conditions on $\mu$ for sufficiency. Economically, $k$ yields a clean comparative static: low $k$ excludes the bad, intermediate $k$ separates ad-tolerant and ad-averse buyers, and high $k$ bundles ads for all types.