“In Medio Stat Virtus”: Targeted Ad in Social Media Platforms with Heterogeneous Participants

Social media platforms face a strategic trade-off when addressing the needs of different user groups: while content providers would like to reach many users with their ads, users are not always interested in the advertised content and may suffer a disutility from advertising. How to create value for and thus attract participants from both sides? Using a formal model, we examine how the platform manages this positive-negative externalities trade-off by resorting to targeted advertising to minimize users’ disutility from advertising. We find that contrary to mainstream theory’s prediction of positive, self-reinforcing indirect network effects, platform configurations can have an unbalanced number of participants on the two sides. We show that “in medio stat virtus” principle applies indeed to this governance trade-off: the optimal governance strategy for the platform lies in-between the pricing level maximizing user benefits and that maximizing provider benefits.