Abstract
How should market designers trade off targeting and competition? We study a natural experiment in the release of new targeting technology for online ads. A platform in our study introduced targeting into select geographic markets based on a discontinuity in local characteristics. We find that advertisers used new targeting to avoid low quality ad inventory. This led to a reduction in ad impressions. When advertisers avoided this inventory, they retreated into smaller, less competitive ad auctions featuring fewer bidders for available ad space. The reduction in competition lowered click prices in the treated areas. Nonetheless, the effects on platform revenue growth were positive. Better targeting improved the consumer experience of advertising. This led to higher consumer clickthrough rates, which raised the platform's revenue by increasing the quantity of clicks sold. The higher click volumes offset the revenue effects of the decrease in prices.