Matching with Conflicts: An Application to the Advertising Industry

In professional service markets, clients who are product market competitors are often reluctant to work with the same service agency. This can effectively restrict the choice set of clients seeking matches, and it may cause agency mergers to reduce efficiency even when static pricing inefficiencies are absent. To understand the importance of conflict, I construct a new data set on matches between pharmaceutical advertisers and advertising agencies from 2002 to 2010 in which competitors are defined by therapeutic classes, and estimate a two-sided matching model using a maximum score estimator. The results show that conflict does indeed reduce the match surplus, and the reduction is greater for a pair of agents who have matched with each other in the previous period. Also, preserving previously formed matches yields much higher surplus than forming new matches. Based on these estimates, I conduct a counterfactual exercise to illustrate the effect of conflict on allocation of matches. I find that 14% of all matches that would have formed in a non-conflict environment are unable to form when conflict is present. Another counterfactual exercise shows that mergers between advertising agencies that previously contracted with competing advertisers decrease surplus by bringing their clients into conflict. Mergers involving agencies that have not previously contracted reduce the number of matching opportunities for new clients and tend to lower the total number of matches made in equilibrium. ⇤I am deeply grateful to Ginger Jin and Andrew Sweeting for their invaluable support and guidance throughout this project. I thank Nikhil Agarwal, Peter Cramton, Jeremy Fox, Avi Goldfarb, John Hatfield, Soohyung (Soo) Lee and many seminar participants for helpful discussions, suggestions and comments. I would also like to thank George Chressanthis for suggesting data sources, and Robert Girondi from the Fox School of Business, Drew Guiteras from McKinney, Prasun Subedi from Pfizer for providing institutional detail on advertising agencies and pharmaceutical marketing. †Department of Economics, Lehigh University. 612 Taylor St, Bethlehem, PA 18015. [email protected].