Online advertising has been disrupted by auctioning systems that are enabled by information technology thus leading to the development of electronic markets.
When Internet advertising began, ad space was sold based on a pre-negotiated price, run-time, and number of “impressions” (views). This did not give users much insight into the effectiveness of the advertisement.
Biased Market
In 1998, a start-up called Overture presented a search engine auction based on a first-price auction where buyers would bid on search terms and pay on a click basis (Pay-per-click), and the highest bidder would win (Karp, 2008).
The introduction of the PPC auction illustrated three phenomena of the shift towards electronic market structures. Information technology allowed for the search term, the ad and the highest bid to be communicated in real-time, producing an Electronic Communication Effect. The Brokerage Effect was achieved with the introduction of technology that brokered between the advertiser bids and ad placements with each search entry, allowing buyers to screen-out placements or search terms individually. Electronic Integration Effect was also achieved in Overture’s ability to redefine both the speed at which transactions could be determined (real-time) but also in the way the information relating to these transactions were utilized (clicks). While this provided more emphasis on effectiveness by moving the price point to an action, the structure of the auction led to an information asymmetry where buyers were not encouraged to bid the true value of the placement.
Shift to Unbiased Market
Recognizing the bias of this first-price auction method, Google further disrupted the industry by introducing their Google AdWords platform which integrated a Second-Price Auction allowing winning buyers to pay $0.01 higher than the bidder with the second highest ad rank. Furthermore, Google integrated the quality of the ad into the selection process of the ad, providing a more unbiased market where the ranking of the ad was based not only on price paid but also based on relevance of the ad to the search term (WordStream, n.d.).
Facebook later entered the market making use of a Vickrey-Clark-Groves auction which calculated the price based on how much value was lost from the rest of the system if the winning ad was displayed (Varian, 2009). This further reduced information asymmetry as buyers in the auction were incentivized to bid according to their true valuations.
Personalization?
With a shift towards programmatic advertising, or AI-enabled auctions, ads are increasingly utilizing data collected from the visitor and intelligently creating the ad and bid, shifting the online advertising industry towards what we believe to be the final evolution stage of electronic markets – Personalized. Additionally, we predict that the industry will continue to expand outside of web browsing such as integrating them to IoT products or other platforms, creating a potential for new entrants. With the use of programmatic, we also predict that consumer privacy concerns will increase and we believe the success of integrating these technologies to other platforms will need to address these concerns.
References
Chieruzzi, M. (2017). Facebook Ads Bidding 101: Everything You Need to Know. [online] AdEspresso. Available at: https://adespresso.com/blog/everything-need-know-facebook-ads-bidding/#2017update [Accessed 11 Oct. 2017].
Dimoka, A., Hong, Y., and Pavlou, P.A. 2012. On Product Uncertainty in Online Markets: Theory and Evidence. MIS Quarterly 36(2) 395-426.
Ingram, M. (2017). Here’s How Google and Facebook Have Taken Over the Digital Ad Industry. [online] Fortune. Available at: http://fortune.com/2017/01/04/google-facebook-ad-industry/ [Accessed 11 Oct. 2017].
Karp, S. (2008). Google AdWords: A Brief History Of Online Advertising Innovation. [online] Publishing 2.0. Available at: http://publishing2.com/2008/05/27/google-adwords-a-brief-history-of-online-advertising-innovation/ [Accessed 11 Oct. 2017].
Malone, T., Yates, J. and Benjamin, R. (1987). Electronic markets and electronic hierarchies. Communications of the ACM, 30(6), pp.484-497.
Metz, C. (2015). Facebook Doesn’t Make as Much Money as It Could—On Purpose. [online] WIRED. Available at: https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/ [Accessed 11 Oct. 2017].
Thomases, H. (2012). What Media Planners Need to Know About Programmatic Buying | ClickZ. [online] Clickz.com. Available at: https://www.clickz.com/what-media-planners-need-to-know-about-programmatic-buying/45880/ [Accessed 11 Oct. 2017].
Varian, H. (2009). Online Ad Auctions. American Economic Review, [online] 99(2), pp.430-434. Available at: http://people.ischool.berkeley.edu/~hal/Papers/2009/online-ad-auctions.pdf [Accessed 11 Oct. 2017].
WordStream, (n.d.). Search Engine Marketing: What It Is & How to Do It Right | WordStream. [online] Wordstream.com. Available at: http://www.wordstream.com/search-engine-marketing [Accessed 11 Oct. 2017].
If Interested, Further Readings:
http://adage.com/article/digital/rush-programmatic-privacy-rules-apply/298060/
http://adage.com/article/privacy-and-regulation/iot-ads-reality-privacy-concerns-follow/307200/
https://www.theguardian.com/media-network/2015/jul/28/internet-things-advertising-marketing
https://hbr.org/2013/03/advertising-and-the-internet-o
