Rationale of the online advertising market: a theoretical model

Abstract

Online advertising is a new industry that is growing at an enormous pace, and that has received a lot of coverage in the media. This work gives economic reasoning to the events that have been happening in this sector. It models the industry structure by postulating di¤erent types of …rms producing goods that are perfect substitutes. We analyze the implications of the existance of economies of scope and of saturation bounds in the production of online ads. We …nd that technology plays a fundamental role in determining which types of …rms exist, and that demand for advertising is also important, when advertising production becomes saturated.