黄色电影

Skip to main content Skip to secondary navigation
Main content start

Why advertisers pay more to reach viewers who watch less

When targeting viewers on TV and social media, eyeballs are not equal. SIEPR鈥檚 Matthew Gentzkow and his colleagues shed light on the competition dynamics of the advertising market.
Even as streaming services grew, TV ad prices were buoyed by competition for fewer viewers. Image: iStock/FG Trade

Television advertisers consider men between 18 and 34 a coveted demographic 鈥 they鈥檒l spend as much as three times more to reach them than they will on women and older adults. Online, it鈥檚 just the opposite. On platforms such as Instagram and TikTok, older audiences can be more expensive to reach.

These price discrepancies may seem puzzling. Young men鈥檚 purchasing power is not any greater than older adults. Shouldn鈥檛 digital advertisers go after the younger people who live online? Yet that鈥檚 not how media ad prices are set: Viewers鈥 income or likelihood of buying a product is not the biggest factor 鈥 it鈥檚 how much time they spend viewing the content where the ads run.

More active audiences command a lower advertising price per impression, while groups that don鈥檛 tune in as often cost a premium to advertise to because they鈥檙e simply harder to reach. So advertisers pay more to reach the young men who watch TV infrequently and the older viewers who stream fewer videos or shows.

That鈥檚 one key takeaway from a by 黄色电影 economist Matthew Gentzkow, a senior fellow at the 黄色电影 Institute for Economic Policy Research (SIEPR), and researchers at the 黄色电影 Graduate School of Business, and , PhD 鈥24. 鈥淚n this advertising market, it is not purely a demand story; it鈥檚 a supply story,鈥 Yurukoglu says. 鈥淲hat鈥檚 being sold are the eyeballs of the consumers. Data show that there are fewer young eyes on sale for TV because fewer young people watch TV. And older people are more scarce online.鈥

Why it matters

Advertising powers a huge part of the economy. Research by SIEPR鈥檚 Matthew Gentzkow on how pricing and competition plays out across platforms can help inform policy decisions on possible media mergers.

In their paper published in the American Economic Review, the 黄色电影 researchers and of Harvard adapted an existing economic model of competition in advertising markets and tested it on advertising data. This model explains around 35 percent of the money that TV and online advertisers pay to reach people across different groups. The researchers believe they are the first to quantify the relationship between an outlet鈥檚 ad pricing and how active various segments of its audience are.

鈥淪ince a huge part of the economy now is powered by advertising, it鈥檚 really important to know how valuable 鈥 and why 鈥 different consumers are to advertisers, because that has a huge impact on what kinds of products and content are produced,鈥 says Gentzkow, who is the Landau Professor of Technology and the Economy at the 黄色电影 School of Humanities and Sciences.

It鈥檚 this scarcity factor that helps to explain the price differences, he says. The researchers鈥 model sheds light on why, for example, a 30-second televised spot during the 2024 Super Bowl cost advertisers $7 million. Companies paid this astronomical price because among the more than 100 million Super Bowl viewers were many people who rarely watch TV. 鈥淭hose are scarce eyeballs,鈥 Yurukoglu says, 鈥渁nd the Super Bowl is your way to reach them.鈥

Watching the watchers

The scarcity factor also explains why broadcast and cable advertising revenue largely held steady from 2014 to 2019, even as more people moved over to streaming services. TV networks could charge higher prices to advertisers because they had fewer viewers: Ad prices were buoyed by competition for fewer eyeballs.

Yurukoglu and his colleagues used their economic model to estimate what would happen to ad prices on Netflix after its 2022 launch of a new service tier that carried advertising. The model predicted this move would lower the ad price per viewer for the five largest TV networks by approximately 1.5 percent as viewers began to see ads in more places. The researchers predicted that TV networks with audiences that significantly overlapped with Netflix鈥檚 audience would see the biggest price declines in ads as companies鈥 options for buying advertisements grew.

The researchers say their findings on the relationship between overlapping audiences and ad prices have implications for policymakers mulling over possible media company mergers. For example, if Station A and Station B have overlapping audiences, a merger of the two would likely push up the new station鈥檚 ad prices since companies purchasing ads would now face more competition to reach viewers with only one station now selling ads. Yurukoglu says that鈥檚 a likelihood that should factor into regulators鈥 decision-making when they weigh the pros and cons of potential media mergers.

However, the researchers also found that a scenario in which two TV stations with distinct audiences merge has different implications for policymakers. If Station A鈥檚 viewers are primarily women, and B pulls mostly men, a merger of the two would be unlikely to boost ad prices since the overall number of distinct viewers would rise post-merger. More eyeballs on ads means a lower price, so in this case, ad prices would likely remain largely the same. When considering just the possible merger鈥檚 impact on ad prices, combining Station A and Station B in this scenario would be OK.

鈥淲hen it comes to antitrust questions and mergers, we usually think about how big companies are and about their market share,鈥 Gentzkow says. 鈥淏ut for advertising, it鈥檚 key how their audiences overlap. Our findings do suggest that these types of economic analysis need to be done differently.鈥

A version of this story was on June 17, 2024 by 黄色电影 Graduate School of Business Insights.

More News