“Retail Media” and Its Impact on the Retail Ecosystem

Abstract

“Retail media” refers to ads served to consumers on retailers’ websites. From being essentially non-existent a decade ago, this market is projected to grow to $100 billion by 2026 in the US, which would be more than 20% of all US ad spend. Retail media has important implications for advertisers (who are typically third-party sellers or brands), retailers and consumers. In this talk, I will focus on the attached paper, in which we use a game theory model to investigate a retailer’s offering of retail media and manufacturers’ responses as manifested in their advertising and distribution strategies. The manufacturers who sell through the retailer use the retailer’s first-party customer data and their own knowledge of which type of customers their products best match with to bid in auctions run by the retailer to place ads (called “endemic ads”). These ads increase the efficiency of matching customers and products, and the retailer relies on advertising as a significant source of profit in comparison to revenue share. However, bidding competition among manufacturers in ad auctions erodes their profits on top of sharing revenue with the retailer, and offering retail media could drive manufacturers away from selling through the retailer to other options such as direct selling. Consequently, a mid-sized retailer may forego retail media even if it is costless to implement. We also study why, and under which conditions, a retailer may allow manufacturers who do not sell on its platform to still place ads on the retailer’s platform (called “non-endemic ads”).