cn eu-17 taylor

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The Microeconomics that Underly DisplayAdvertising

Ad Monsters Publisher ForumOxford, November 2011

Greg TaylorOxford Internet InstituteUniversity 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

Quantity

Demand

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Quantity

Demand

Supply

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Quantity

Demand

Supply

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Quantity

Demand

Supply

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Quantity

Demand

Supply

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Quantity

Demand

Supply

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

and to place ads

Supply o

f space

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

and to place ads

Supply o

f space

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

and to place ads

Supply o

f space

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What business are we in?

I Digital technologies bring an end to one kind of scarcity.

I But increasing relevance of the scarcity of attention.

I No reason to believe that engaging with a consumer hasbecome any less valuable.

I Capturing that value means recognising that the relevantmarket is the attention market.

I A funny market: requires careful management on thedemmand- and the supply-side.

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What business are we in?

I Digital technologies bring an end to one kind of scarcity.

I But increasing relevance of the scarcity of attention.

I No reason to believe that engaging with a consumer hasbecome any less valuable.

I Capturing that value means recognising that the relevantmarket is the attention market.

I A funny market: requires careful management on thedemmand- and the supply-side.

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What do advertisers want?

I What do advertisers want?

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

I Three important components of an advertising opportunity’svalue:

I How many consumers will see it—what is the raw volume ofattention available?

I How good is the matching—how much of the attention can beconverted into value?

I What is the competitive effect of the ad—how is attentiondistributed and what are the implications for advertisers’businesses?

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What do advertisers want?

I What do advertisers want?

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

I Three important components of an advertising opportunity’svalue:

I How many consumers will see it—what is the raw volume ofattention available?

I How good is the matching—how much of the attention can beconverted into value?

I What is the competitive effect of the ad—how is attentiondistributed and what are the implications for advertisers’businesses?

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Outline

The wrong market

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Some empirical evidence on targeting

I Goldfarb, A. & C. E. Tucker (2010): “Privacy Regulation andOnline Advertising,” working paper.

I Large scale study of purchase intent after exposure to displayads.

I Half of respondents exposed to ad and half not. Questionedabout purchase intent before and after.

I Look at effect of EU Privacy Directive that restricted use ofweb bugs and cookies.

I Controlling for a range of factors, the directive reduced adeffectiveness by 65% relative to consumers outside of Europe(or consumers within europe surfing sites outside).

I Especially severe effect for sites with general content.

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I Goldfarb, A. & C. E. Tucker (2010): “Privacy Regulation andOnline Advertising,” working paper.

I Half of respondents exposed to ad and half not. Questionedabout purchase intent before and after.

I Look at effect of EU Privacy Directive that restricted use ofweb bugs and cookies.

I Controlling for a range of factors, the directive reduced adeffectiveness by 65% relative to consumers outside of Europe(or consumers within europe surfing sites outside).

I Especially severe effect for sites with general content.

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I Chandra, A. (2009): “Targeted Advertising: The Role ofSubscriber Characteristics in Media Markets,” Journal ofIndustrial Economics, 58(1), 58–84.

I More competitive media markets have lower subscriptionprices, but higher ad rates.

I More competitive markets have more homogeneousreaderships.

I Competition is helping the publishers to segment the marketmore effectively into target demographics & locations.

I In practical terms, a fully homogeneous readership is worth27% vis-a-vis randomised readership.

I Chandra, A., and U. Kaiser (2010): “Targeted Advertising inMagazine Markets,” working paper.

I Contextual targeting: A magazine with equal male/femalereadership earns 32% less than one with readers of uniformgender.

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I Chandra, A. (2009): “Targeted Advertising: The Role ofSubscriber Characteristics in Media Markets,” Journal ofIndustrial Economics, 58(1), 58–84.

I More competitive media markets have lower subscriptionprices, but higher ad rates.

I More competitive markets have more homogeneousreaderships.

I Competition is helping the publishers to segment the marketmore effectively into target demographics & locations.

I In practical terms, a fully homogeneous readership is worth27% vis-a-vis randomised readership.

I Chandra, A., and U. Kaiser (2010): “Targeted Advertising inMagazine Markets,” working paper.

I Contextual targeting: A magazine with equal male/femalereadership earns 32% less than one with readers of uniformgender.

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I Goldfarb, A. & C.Tucker (2010): “Online Display Advertising:Targeting and Obtrusiveness,” working paper.

I Ads that are contextually targeted increase purchase intentmore than those that are not.

I Ads that are ‘obtrusive’ increase purchase intent more thanthose that are not.

I Ads that are contextually targeted and obtrusive performworse than just targeted ads.

I Data seems to suggest that obtrusive ads make consumersmore aware of privacy factors.

I Effect strongest for those who wont disclose income and formedical/financial ads.

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Targeting and blocking

I Johnson, J. P. (2009): “Tageted Advertinsg and AdvertisingAvoidance,” working paper.

I Be mindful of the value proposition offered to consumers aswell as advertisers.

I A corporate mantra for Google.

I Given highly accurate targeting, advertisers have an idea aboutwho they would like to contact.

I Do firms and consumers agree on the appropriate threshold?Consumers who see too many/the wrong kind of ads will turnto avoidance.

I This also reduces the effective size of ad inventory for otherfirms.

I E.g. learn from Google’s reserve price.

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Targeting and blocking

I Johnson, J. P. (2009): “Tageted Advertinsg and AdvertisingAvoidance,” working paper.

I Be mindful of the value proposition offered to consumers aswell as advertisers.

I A corporate mantra for Google.

I Given highly accurate targeting, advertisers have an idea aboutwho they would like to contact.

I Do firms and consumers agree on the appropriate threshold?Consumers who see too many/the wrong kind of ads will turnto avoidance.

I This also reduces the effective size of ad inventory for otherfirms.

I E.g. learn from Google’s reserve price.

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Outline

The wrong market

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I Ads are posted by firms that expect their profit to be higherwith ads than without.

I This is why firms value ads.I An important part of understanding the value of an ad is

understanding how the ad influences profits.I Partly by focusing attention on the product and directly

increasing demand.I But also by changing the competitive dynamics of the industry.

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What is the competitive effect of the ad?I Rauch, F. (2011): “Advertising Expenditure and Consumer

Prices,” working paper.I Firms advertise less when advertising becomes more expensive.I Level of advertising and consumer prices are closely related.

I In persuasive advertising relationship is positive.I In informative advertising relationship is negative.

I Changes in the advertising market directly affect businessstrategies in the product market.

I This is important because what is going on in the productmarket drives the value of an ad.

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Targeting, RTB, and target selection

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

Strong Windows

Preference

Strong OSX

Preference

No Strong

Preference

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

I Should ads be targeted at loyals or shoppers?I Advertising to loyals is a matter of keeping them informed and

identified with the brand and then reaping the rewards.I Advertising to shoppers is more messy. . .

I As advertising intensities increase, shoppers becomeincreasingly well informed and advertisers are forced into closercompetition.

I Puts a ceiling on advertising intensities to shoppers.I Targeting has two effects:

I Efficiency effect (fewer ads needed for same goal).I Effectiveness effect (sending ads becomes more attractive).I If advertising is cheap then firms typically advertise widely

before targeting so that targeting causes ad expenditure to fall(efficiency dominates).

I If ads are expensive then targeting makes reaching moreconsumers attractive and expenditure increases.

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identified with the brand and then reaping the rewards.I Advertising to shoppers is more messy. . .I As advertising intensities increase, shoppers become

increasingly well informed and advertisers are forced into closercompetition.

I Puts a ceiling on advertising intensities to shoppers.

I Targeting has two effects:I Efficiency effect (fewer ads needed for same goal).I Effectiveness effect (sending ads becomes more attractive).I If advertising is cheap then firms typically advertise widely

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I Efficiency effect (fewer ads needed for same goal).I Effectiveness effect (sending ads becomes more attractive).

I If advertising is cheap then firms typically advertise widelybefore targeting so that targeting causes ad expenditure to fall(efficiency dominates).

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I Efficiency effect (fewer ads needed for same goal).I Effectiveness effect (sending ads becomes more attractive).I If advertising is cheap then firms typically advertise widely

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I Galeotti, A. & J. L. Moraga-Gonzales (2008): “Segmentation,Advertising, and Prices”, International Journal of IndustrialOrganization, 26, 1106–1119.

I Roy, S. (2000): “Strategic Segmentation of a Market”,International Journal of Industrial Organization, 18,1279–1290.

I In fact, targeted advertising and demographic profiling canfunction to assist segmentation more generally.

I Firms have a natural tendency to want to differentiate andtargeting provides a mechanism to achieve this.

I This is another way that ads can provide value to firms; inprinciple, dimension for segmentation can be arbitrary (e.g.demographic).

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Targeting, RTB, and target selectionI Brahim, N. B., R, Lahmandi-Ayed & D. Laussel (2011): “Is

Targeted Advertising Always Beneficial?”, InternationalJournal of Industrial Organization, 29(6), 678–689.

I When ads are cheap, no point in advertising to rival’s loyalcustomers.

I When ads are more expensive, this becomes more attractivebecause rival will advertise less to its loyals.

I Can get very competitive and depress prices.I Ultimate knock-on conseqences for ad values.

Ad cost

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Targeting, RTB, and target selectionI Brahim, N. B., R, Lahmandi-Ayed & D. Laussel (2011): “Is

Targeted Advertising Always Beneficial?”, InternationalJournal of Industrial Organization, 29(6), 678–689.

I When ads are cheap, no point in advertising to rival’s loyalcustomers.

I When ads are more expensive, this becomes more attractivebecause rival will advertise less to its loyals.

I Can get very competitive and depress prices.I Ultimate knock-on conseqences for ad values.

Ad cost

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Attention retention

I Taylor, G. (2011): “Attention Retention: Targeted Advertisingand the Provision of Media Content,” working paper.

I As targeting technologies evolve, this problem will becomemore severe: competing sellers can increasingly target thesame consumer need.

I The better can rivals target the same need as me, the morelikely am I to have to compete with them if they have thechance to target the same consumers.

I What I would really like is exclusivity.I Publishers can help here: sticky magnet content buys an

exclusive share of attention—can be viewed as a device tomitigate the adverse product market effects of targeting.

I Athey, S., E. Calvano, & J. S. Gans (2011): “The Impact ofthe Internet on Advertising Markets for News Media,” workingpaper.

I Magnet content can solve wasted vs. missed impressionsproblem.

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Attention retention

I Taylor, G. (2011): “Attention Retention: Targeted Advertisingand the Provision of Media Content,” working paper.

I As targeting technologies evolve, this problem will becomemore severe: competing sellers can increasingly target thesame consumer need.

I The better can rivals target the same need as me, the morelikely am I to have to compete with them if they have thechance to target the same consumers.

I What I would really like is exclusivity.I Publishers can help here: sticky magnet content buys an

exclusive share of attention—can be viewed as a device tomitigate the adverse product market effects of targeting.

I Athey, S., E. Calvano, & J. S. Gans (2011): “The Impact ofthe Internet on Advertising Markets for News Media,” workingpaper.

I Magnet content can solve wasted vs. missed impressionsproblem.

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Real time bidding & conflation

I Levine, J. & P. Milgrom (2011): “Online Advertising:Heterogeneity and Conflation in Market Design,” AmericanEconomic Review, 100(2), 603–307.

I In markets for commodities (e.g. wheat), there is usually someconflation/standardisation to make markets thicker and reducetransaction costs.

I RTB deconflates advertising markets.I Should be careful to guard against cherry-picking.I Also need to make sure market doesn’t get too thin. . .

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I de Corniere, A. & R. de Nijs (2011): “Online Advertising andPrivacy,” working paper.

I With random impression, impression values are low.I Law of large numbers → good rent extraction.I Targeted ads with real-time bidding: impression value high.I But now advertisers have private info and get information rent.I Still usually better off with RTB, but need to consider

distribution of values.

I Can maybe learn from other markets e.g. diamonds: oneauction to set base price, and then individual cuts areadjusted to a pre-announced schedule.

I Somewhat analogous to search engine auctions.

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I de Corniere, A. & R. de Nijs (2011): “Online Advertising andPrivacy,” working paper.

I With random impression, impression values are low.I Law of large numbers → good rent extraction.I Targeted ads with real-time bidding: impression value high.I But now advertisers have private info and get information rent.I Still usually better off with RTB, but need to consider

distribution of values.

I Can maybe learn from other markets e.g. diamonds: oneauction to set base price, and then individual cuts areadjusted to a pre-announced schedule.

I Somewhat analogous to search engine auctions.

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Outline

The wrong market

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Communication

I An advertisement is basically a message from a firm to aconsumer.

I The advertiser’s objective is to communicate something(product attributes, brand values etc.) to the consumer.

I But there’s a problem: interests aren’t necessarily aligned.

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Communication

Consumer Firm (Merchant)

Ad-Message

Interpretation

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Fee structures

I Athey, S., & G. Ellison (2011): “Position Auctions withConsumer Search,” Quarterly Journal of Economics, 126(3),12131270.

I Taylor, G. (2011): “The Informativeness of On-lineAdvertising,” International Journal of Industrial Organization,29(6), 668-677.

I PPI advertising:I Ad’s cost is sunk—paid for the impression already; what to do

with it?I Attempt to maximally attract potential customers.

I Pay-per-click:I Don’t want to pay for worthless clicks.I Encourage valuable consumers to click and discourage

worthless ones—create informative ads.

I Pay-per-sale:I Sale to a well-matched consumer and to a poorly matched

consumer worth the same.

I Has implications for ad’s value, and for who clicks.

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Fee structures

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Fee structures

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Fee structures

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Fee structures

I Hu, Y. (2004): “Performance-based pricing Models in OnlineAdvertising,”

I Sundararajan, A. (2003): “Pricing Digital Marketing:Information, Risk Sharing and Performance,” working paper.

I Fee structure also has incentive implications for advertisers.I Ad’s performance is random; per-performance pricing acts as a

kind of insurance.I Can make a risk averse firm more willing to advertise.I As a publisher, better placed to diversify risk.

I But shouldn’t insure too much—to attract the right kind ofadvertisers/incentivise effort.

I Zhu, Y., & K. C. Wilbur (2011): “Hybrid AdvertisingAuctions,” Marketing Science, 30(2), 249273.

I Beware of adverse selection when offering a choice.

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Fee structures

kind of insurance.I Can make a risk averse firm more willing to advertise.I As a publisher, better placed to diversify risk.I But shouldn’t insure too much—to attract the right kind of

advertisers/incentivise effort.

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Fee structures

kind of insurance.I Can make a risk averse firm more willing to advertise.I As a publisher, better placed to diversify risk.I But shouldn’t insure too much—to attract the right kind of

advertisers/incentivise effort.

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Conclusion

I The future seems bright for the attention business.

I Technological innovations add real value.

I But there’s still a role for careful thought & design in makingsure the right ads go in front of the right people.

I Solving this issue on both the consumer & the advertiser sideis key to success.

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