Digital advertising revenues grew from nothing to $108 billion in 25 years, eclipsing all traditional advertising media combined. Yet there are indicators that unregulated markets for digital advertising have experienced some problems. The E.U. fined Google more than $9 billion in three antitrust cases and the U.S. Federal Trade Commission fined Facebook $5 billion after it broke a 2012 Consent Order. Prominent politicians have criticized the industry and proposed structural reforms. New privacy laws mandate transparency and consent requirements for data-driven advertising and user identification practices.
Several comprehensive reviews of digital platform markets have advised more regulation. For example, the Australian Competition and Consumer Commission made 23 recommendations in 2019, including that “a specialist digital platforms branch be established” to proactively monitor digital markets, enforce laws, conduct inquiries, and recommend actions to address consumer harm and market failure. The House of Lords Select Committee on Communications (2019) reached similar conclusions, noting “a lack of understanding among policy-makers.” Similar findings have been offered by the European Commission Directorate-General for Competition; the U.K. Department of Digital Culture, Media & Sport; and the U.K. Digital Competition Expert Panel; with ongoing investigations by the U.S. Federal Trade Commission and the U.K. Competition and Markets Authority, among others.
A new article in the Journal of Marketing seeks to help policymakers understand four pervasive issues in digital advertising markets and how they impact market efficiency. The primary focus of the article is on advertising effect measurement, organizational inefficiencies in advertising, ad blocking, and ad fraud. All of these issues predate digital advertising, but they manifest in new ways in markets for digital advertising.
First, some key definitions:
- Ad effect measurement is the estimation of incremental effects of advertisements on consumer behaviors. Ignorance or uncertainty about ad effects may inefficiently distort advertisers’ reservation prices, demand, budgets, and bids for ads.
- Organizational inefficiencies occur within advertising organizations or between advertisers and their self-interested agencies. They may lead to inefficient advertising decisions.
- Ad blocking is a technology that prevents advertisements from being displayed to consumers. Ad blockers may inefficiently steal advertising revenues from publishers and decrease the returns to providing high-quality content.
- Ad fraud is a collection of practices that misrepresent advertising inventory or disguise machines as humans in order to steal advertising expenditures. Most industry estimates indicate fraud takes 10-30% of total digital advertising revenue.
The research team finds that most marketers either do not or cannot measure incremental ad effects. As a consequence, uncertainty about ad effects may distort market demand for advertising. Numerous intermediaries separate marketers from publishers, each of whom takes a cut of advertising expenditures and has its own private information and incentives, leading to economic inefficiencies and moral hazard. Additionally, intra-firm frictions can lead to suboptimal advertising decisions. Consumers use ad blocking software to passively prevent advertisements from being displayed, blocking some efficient advertisements by default. Advertising fraud misrepresents advertising opportunities and directs ad exposures to machines for the purpose of stealing advertising budgets. Markets have developed mechanisms to catch advertising supply chain participants when they steal from each other, but we still lack equivalent mechanisms to catch fraud that steals from the advertiser’s budget.
In summary, we want policymakers to fully understand and consider the important institutional features that are particular to digital advertising markets. Effective regulation requires a full understanding of the context in which digital advertising decisions are made. We need to make sure the regulatory community avoids drafting bad rules and is not co-opted by the dominant players in the digital advertising industry.
Go to the Journal of Marketing