Audience extension is an application of behavioral targeting. Audience extension allows advertisers to target a premium site audience, which is often sold out, across other sites that belong to the same ad network.
The ad buy is then made at a lower CPM than running ads on the premium site alone.
Audience extension is used for premium site audiences which are especially sought after. Amazon and eBay have an audience extension offer. Moreover, an audience extension feature is offered in DoubleClick for Publishers ad server.
Principles of audience extension are sometimes used within a publisher site to extent audience of high potential channels (travel, financials, automotive). This valuable audience is then partially "recovered" on less sought after channels (weather, local news...) on the same publisher website.
Audience extension requires cookies as all behavioral targeting techniques.
Audience extension can have another meaning in which a merchant is offered to reach on an ad network an audience reflecting his visitor profiles.
The principles of reach extension illustrated by Netmining:
This form of audience extension well explained in a video:
An audience extension allowing advertisers to reach qualified eBay visitors on FetchBack network: