Cn eu-17 taylor

The Microeconomics that Underly Display
Advertising

Ad Monsters Publisher Forum
Oxford, November 2011

Greg Taylor
Oxford Internet Institute
University of Oxford

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Outline

The wrong market

How good is the matching?

What is the competitive eﬀect of the ad?

Ads and the consumer

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The simple economics of supply & demand

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Quantity of newspaper/TV/radio/billboard ad space.

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Quantity of newspaper/TV/radio/billboard/Internet ad space.

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Supply of attention
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Quantity of newspaper/TV/radio/billboard/Internet ad space.

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What business are we in?

Digital technologies bring an end to one kind of scarcity.
But increasing relevance of the scarcity of attention.
No reason to believe that engaging with a consumer has
become any less valuable.

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What business are we in?

Digital technologies bring an end to one kind of scarcity.
But increasing relevance of the scarcity of attention.
No reason to believe that engaging with a consumer has
become any less valuable.
Capturing that value means recognising that the relevant
market is the attention market.
A funny market: requires careful management on the
demmand- and the supply-side.

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What do advertisers want?

Ultimately: the purpose of advertising is to convince lots of
people to buy.

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Ultimately: the purpose of advertising is to convince lots of
people to buy.
Three important components of an advertising opportunity’s
value:
How many consumers will see it—what is the raw volume of
attention available?
How good is the matching—how much of the attention can be
converted into value?
What is the competitive eﬀect of the ad—how is attention
distributed and what are the implications for advertisers’
businesses?

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Some empirical evidence on targeting

Goldfarb, A. & C. E. Tucker (2010): “Privacy Regulation and
Online Advertising,” working paper.
Large scale study of purchase intent after exposure to display
ads.
Half of respondents exposed to ad and half not. Questioned
about purchase intent before and after.
Look at eﬀect of EU Privacy Directive that restricted use of
web bugs and cookies.

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Goldfarb, A. & C. E. Tucker (2010): “Privacy Regulation and
Online Advertising,” working paper.
ads.
Half of respondents exposed to ad and half not. Questioned
about purchase intent before and after.
Look at effect of EU Privacy Directive that restricted use of
web bugs and cookies.
Controlling for a range of factors, the directive reduced ad
effectiveness by 65% relative to consumers outside of Europe
(or consumers within europe surfing sites outside).
Especially severe effect for sites with general content.

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Chandra, A. (2009): “Targeted Advertising: The Role of
Subscriber Characteristics in Media Markets,” Journal of
Industrial Economics, 58(1), 58–84.
More competitive media markets have lower subscription
prices, but higher ad rates.
More competitive markets have more homogeneous
readerships.
Competition is helping the publishers to segment the market
more eﬀectively into target demographics & locations.
In practical terms, a fully homogeneous readership is worth
27% vis-´-vis randomised readership.
a

. . . . . .


Chandra, A. (2009): “Targeted Advertising: The Role of
Subscriber Characteristics in Media Markets,” Journal of
Industrial Economics, 58(1), 58–84.
More competitive media markets have lower subscription
prices, but higher ad rates.
More competitive markets have more homogeneous
readerships.
Competition is helping the publishers to segment the market
more eﬀectively into target demographics & locations.
In practical terms, a fully homogeneous readership is worth
27% vis-´-vis randomised readership.
a
Chandra, A., and U. Kaiser (2010): “Targeted Advertising in
Magazine Markets,” working paper.
Contextual targeting: A magazine with equal male/female
readership earns 32% less than one with readers of uniform
gender.

. . . . . .


Goldfarb, A. & C.Tucker (2010): “Online Display Advertising:
Targeting and Obtrusiveness,” working paper.
ads.
Ads that are contextually targeted increase purchase intent
more than those that are not.
Ads that are ‘obtrusive’ increase purchase intent more than
those that are not.

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ads.
those that are not.
Ads that are contextually targeted and obtrusive perform
worse than just targeted ads.

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ads.
those that are not.
Ads that are contextually targeted and obtrusive perform
worse than just targeted ads.
Data seems to suggest that obtrusive ads make consumers
more aware of privacy factors.
Eﬀect strongest for those who wont disclose income and for
medical/ﬁnancial ads.

. . . . . .

Targeting and blocking

Johnson, J. P. (2009): “Tageted Advertinsg and Advertising
Avoidance,” working paper.
Be mindful of the value proposition oﬀered to consumers as
well as advertisers.
A corporate mantra for Google.

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Targeting and blocking

Johnson, J. P. (2009): “Tageted Advertinsg and Advertising
Avoidance,” working paper.
Be mindful of the value proposition offered to consumers as
well as advertisers.
A corporate mantra for Google.
Given highly accurate targeting, advertisers have an idea about
who they would like to contact.
Do firms and consumers agree on the appropriate threshold?
Consumers who see too many/the wrong kind of ads will turn
to avoidance.
This also reduces the effective size of ad inventory for other
firms.
E.g. learn from Google’s reserve price.

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Ads are posted by firms that expect their profit to be higher
with ads than without.
This is why firms value ads.
An important part of understanding the value of an ad is
understanding how the ad influences profits.
Partly by focusing attention on the product and directly
increasing demand.
But also by changing the competitive dynamics of the industry.

. . . . . .


What is the competitive eﬀect of the ad?
Rauch, F. (2011): “Advertising Expenditure and Consumer
Prices,” working paper.
Firms advertise less when advertising becomes more expensive.
Level of advertising and consumer prices are closely related.
In persuasive advertising relationship is positive.
In informative advertising relationship is negative.

Changes in the advertising market directly aﬀect business
strategies in the product market.
This is important because what is going on in the product
market drives the value of an ad.

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Targeting, RTB, and target selection

Targeting and real-time bidding allow more selectivity over the
types of consumer that see an ad.

Strong Windows No Strong Strong OSX
Preference Preference Preference

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Iyer, G., D. Soberman & J. M. Villas-Boas (2005): “The
Targeting of Advertising,” Marketing Science, 24(3), 461–476.

Should ads be targeted at loyals or shoppers?
Advertising to loyals is a matter of keeping them informed and
identiﬁed with the brand and then reaping the rewards.
Advertising to shoppers is more messy. . .

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As advertising intensities increase, shoppers become
increasingly well informed and advertisers are forced into closer
competition.
Puts a ceiling on advertising intensities to shoppers.

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competition.
Targeting has two effects:
Efficiency effect (fewer ads needed for same goal).
Effectiveness effect (sending ads becomes more attractive).

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competition.
Targeting has two effects:
Efficiency effect (fewer ads needed for same goal).
Effectiveness effect (sending ads becomes more attractive).
If advertising is cheap then firms typically advertise widely
before targeting so that targeting causes ad expenditure to fall
(efficiency dominates).
If ads are expensive then targeting makes reaching more
consumers attractive and expenditure increases.
. . . . . .


Galeotti, A. & J. L. Moraga-Gonzales (2008): “Segmentation,
Advertising, and Prices”, International Journal of Industrial
Organization, 26, 1106–1119.
Roy, S. (2000): “Strategic Segmentation of a Market”,
International Journal of Industrial Organization, 18,
1279–1290.
In fact, targeted advertising and demographic profiling can
function to assist segmentation more generally.
Firms have a natural tendency to want to differentiate and
targeting provides a mechanism to achieve this.
This is another way that ads can provide value to firms; in
principle, dimension for segmentation can be arbitrary (e.g.
demographic).

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Brahim, N. B., R, Lahmandi-Ayed & D. Laussel (2011): “Is
Targeted Advertising Always Beneﬁcial?”, International
Journal of Industrial Organization, 29(6), 678–689.
When ads are cheap, no point in advertising to rival’s loyal
customers.
When ads are more expensive, this becomes more attractive
because rival will advertise less to its loyals.

. . . . . .

Brahim, N. B., R, Lahmandi-Ayed & D. Laussel (2011): “Is
Targeted Advertising Always Beneﬁcial?”, International
Journal of Industrial Organization, 29(6), 678–689.
When ads are cheap, no point in advertising to rival’s loyal
customers.
When ads are more expensive, this becomes more attractive
because rival will advertise less to its loyals.
Can get very competitive and depress prices.
Ultimate knock-on conseqences for ad values.

Ad cost

. . . . . .

Attention retention
Taylor, G. (2011): “Attention Retention: Targeted Advertising
and the Provision of Media Content,” working paper.
As targeting technologies evolve, this problem will become
more severe: competing sellers can increasingly target the
same consumer need.
The better can rivals target the same need as me, the more
likely am I to have to compete with them if they have the
chance to target the same consumers.
What I would really like is exclusivity.
Publishers can help here: sticky magnet content buys an
exclusive share of attention—can be viewed as a device to
mitigate the adverse product market eﬀects of targeting.

. . . . . .

Attention retention
Taylor, G. (2011): “Attention Retention: Targeted Advertising
and the Provision of Media Content,” working paper.
As targeting technologies evolve, this problem will become
more severe: competing sellers can increasingly target the
same consumer need.
The better can rivals target the same need as me, the more
likely am I to have to compete with them if they have the
chance to target the same consumers.
What I would really like is exclusivity.
Publishers can help here: sticky magnet content buys an
exclusive share of attention—can be viewed as a device to
mitigate the adverse product market eﬀects of targeting.
Athey, S., E. Calvano, & J. S. Gans (2011): “The Impact of
the Internet on Advertising Markets for News Media,” working
paper.
Magnet content can solve wasted vs. missed impressions
problem.

. . . . . .

Real time bidding & conflation

Levine, J. & P. Milgrom (2011): “Online Advertising:
Heterogeneity and Conflation in Market Design,” American
Economic Review, 100(2), 603–307.
In markets for commodities (e.g. wheat), there is usually some
conflation/standardisation to make markets thicker and reduce
transaction costs.
RTB deconflates advertising markets.
Should be careful to guard against cherry-picking.
Also need to make sure market doesn’t get too thin. . .

. . . . . .


de Corni`re, A. & R. de Nijs (2011): “Online Advertising and
e
Privacy,” working paper.
With random impression, impression values are low.
Law of large numbers → good rent extraction.
Targeted ads with real-time bidding: impression value high.
But now advertisers have private info and get information rent.
Still usually better oﬀ with RTB, but need to consider
distribution of values.

. . . . . .


de Corni`re, A. & R. de Nijs (2011): “Online Advertising and
e
Privacy,” working paper.
With random impression, impression values are low.
Law of large numbers → good rent extraction.
Targeted ads with real-time bidding: impression value high.
But now advertisers have private info and get information rent.
Still usually better oﬀ with RTB, but need to consider
distribution of values.
Can maybe learn from other markets e.g. diamonds: one
auction to set base price, and then individual cuts are
adjusted to a pre-announced schedule.
Somewhat analogous to search engine auctions.

. . . . . .

Communication

An advertisement is basically a message from a ﬁrm to a
consumer.
The advertiser’s objective is to communicate something
(product attributes, brand values etc.) to the consumer.
But there’s a problem: interests aren’t necessarily aligned.

. . . . . .

Communication

Ad-Message

Interpretation

Consumer Firm (Merchant)

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Fee structures
Athey, S., & G. Ellison (2011): “Position Auctions with
Consumer Search,” Quarterly Journal of Economics, 126(3),
12131270.
Taylor, G. (2011): “The Informativeness of On-line
Advertising,” International Journal of Industrial Organization,
29(6), 668-677.
PPI advertising:
Ad’s cost is sunk—paid for the impression already; what to do
with it?
Attempt to maximally attract potential customers.

. . . . . .

Fee structures
12131270.
29(6), 668-677.
PPI advertising:
with it?
Pay-per-click:
Don’t want to pay for worthless clicks.
Encourage valuable consumers to click and discourage
worthless ones—create informative ads.

. . . . . .

Fee structures
12131270.
29(6), 668-677.
PPI advertising:
with it?
Pay-per-click:
Pay-per-sale:
Sale to a well-matched consumer and to a poorly matched
consumer worth the same.

. . . . . .

Fee structures
12131270.
29(6), 668-677.
PPI advertising:
with it?
Pay-per-click:
Pay-per-sale:
Sale to a well-matched consumer and to a poorly matched
consumer worth the same.
Has implications for ad’s value, and for who clicks.
. . . . . .

Fee structures

Hu, Y. (2004): “Performance-based pricing Models in Online
Advertising,”
Sundararajan, A. (2003): “Pricing Digital Marketing:
Information, Risk Sharing and Performance,” working paper.
Fee structure also has incentive implications for advertisers.
Ad’s performance is random; per-performance pricing acts as a
kind of insurance.
Can make a risk averse ﬁrm more willing to advertise.
As a publisher, better placed to diversify risk.

. . . . . .

Fee structures

Advertising,”
kind of insurance.
But shouldn’t insure too much—to attract the right kind of
advertisers/incentivise eﬀort.

. . . . . .

Fee structures

Advertising,”
kind of insurance.
But shouldn’t insure too much—to attract the right kind of
advertisers/incentivise eﬀort.
Zhu, Y., & K. C. Wilbur (2011): “Hybrid Advertising
Auctions,” Marketing Science, 30(2), 249273.
Beware of adverse selection when oﬀering a choice.

. . . . . .

Conclusion

The future seems bright for the attention business.
Technological innovations add real value.
But there’s still a role for careful thought & design in making
sure the right ads go in front of the right people.
Solving this issue on both the consumer & the advertiser side
is key to success.

. . . . . .

Cn eu-17 taylor

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