https://macropaperwarehouse.com/authors/james-siderius/James SideriusHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/online-business-models-digital-ads-and-user-welfare/https://macropaperwarehouse.com/papers/online-business-models-digital-ads-and-user-welfare/<p>Acemoglu, Huttenlocher, Ozdaglar, and Siderius develop a two-sided platform model to study the welfare consequences of digital advertising as an online business model. The platform intermediates between a firm selling a horizontally differentiated product and a continuum of users who derive utility from both entertaining content and informative signals about product quality embedded in ads. Users have a two-dimensional type: a sophistication dimension (sophisticated with probability lambda, naïve with probability 1-lambda) and a product-quality dimension (high quality with prior probability q). The central departure from the standard informational-advertising literature is that sophisticated users hold the correct model of the ad signal process, while naïve users underestimate the false-positive rate — the probability that a low-quality product generates a positive ad signal (phi_0). Naïve users perceive this false-positive rate to be phi_{0,N} = omega_N * omega_P * phi_0, where omega_N &lt;= 1 captures inherent naïveté and omega_P &lt;= 1 captures failure to understand personalized targeting, so phi_{0,N} &lt; phi_0. The equilibrium concept is Berk-Nash equilibrium (Esponda and Pouzo 2016), meaning all agents are Bayesian given their subjective model.</p>