Dear Readers,
This edition of the Chronicle deals with the antitrust responses to one of the most ubiquitous, and complex phenomena in online commerce: online ads.
Today, it is almost quaint to consider that online advertising was strictly banned at the dawn of the Internet, as indeed was any “use for commercial activities by for-profit institutions.” From the lifting of this ban in 1991 to today, spending on online advertising has grown to far surpass that spent on traditional outlets such as print, TV, and other broadcast and physical media. Online advertising is multifaceted, and covers many types of online media, including email, search engines, social media, video advertising on online streaming platforms, traditional web banner advertising, and mobile advertising.
Advertising on each of these media types is itself a multi-level industry, comprising the advertisers themselves, ad agencies, ad exchanges, and a plethora of intermediaries and data brokers that automate which ads are shown to which consumers and when, usually in a programmatic auction-based system (all of which together is sometimes put under the collective umbrella term “ad tech.”).
While online advertising undoubtedly has produced efficiencies compared to older techniques, antitrust issues inevitably arrive at key bottlenecks in the chain that leads to a particular ad being targeted at a particular consumer. This technology and market structure is constantly evolving, and has been subject to numerous market studies, antitrust actions, and contested merger decisions in recent years. The pieces in this Chronicle throw a critical eye on the application of antitrust and economic principles to this ever-changing sector.
As the world’s leading online search (and search advertising) provider, Google has inevitably been subject to intense scrutiny. Alexander Witte & Jan Krämer open this Chronicle by discussing Google’s practices in the ad tech industry and explore potential policy interventions that would combine structural separation of Google’s ad server function from its remaining ad tech services and ensuring non-discriminatory access to essential inputs on the demand-side. As the authors note, implementing such policy interventions would require regulators and policymakers to carefully balance the promotion of competition against the potential costs of disrupting efficiency gains and technical synergies offered by Google’s integrated services, ultimately aiming for a more transparent, competitive, and innovative ad tech landscape that serves the best interests of all stakeholders.
As Thomas Hoppner & Philipp Westerhoff note, data is the lubricant of the online advertising world, and access to data has become a central competitive factor in the advertising business. The importance of data for a publisher, an advertiser, or an ad tech intermediary varies significantly depending on the advertising format in question. The authors outline the relevance of data for competition on the various sub-markets of online advertising and their respective significance for the digital ecosystem. It concludes that because the most sustainable positive effects emanate overall from behavior-based advertising, competition authorities must pay particular attention to any measures by dominant companies to artificially restrict access to data required for behavioral advertising.
Returning to first principles, Kenneth C. Wilbur considers how textbook microeconomic techniques, particularly “revealed preference theory,” should be applied in online advertising markets. The piece argues that the necessary conditions for classic revealed preference theory fail for most advertisers, due to incentive misalignments, ambiguity about available advertising opportunities, and fundamental challenges in estimating causal advertising effects. It also argues that some advertisers’ choices may reveal preferences, particularly those who pursue performance advertising objectives, buy their own media, and try to estimate incremental advertising effects. Finally, the paper argues that revealed preference theory can, however, apply to consumers and creators with appropriate model specification.
Delving further into the economics of online advertising, Sean F. Ennis draws a useful comparison between the economics of traditional print-based media (the “yellow pages”) and the techniques employed to advertise on search engines. The author argues that that this shift has been accompanied by fundamental changes in the advertising model firms employ due to three main differences between media technologies: content “depth,” display space, and cost structure. The printed yellow pages are unconstrained in paper space, as new pages are easily added, so pricing was based on the size of the ad. Search engines have a different problem, to allocate scarce space on a screen to its best use, auctioning off scarce screen space and clicks. But while auctions by click price expand opportunities for advertisers who could not cover the price of printed ads, the aggregate effect of the move to search engines must account for screen scarcity, content detail and the ability to extract higher value from higher value ads.
Finally, Holger Dubberstein looks at technological developments since the German Bundeskartellamt’s August 2022 Discussion Report into non-search online advertising. The piece outlines these developments and relates them to the Discussion Report’s findings regarding the market structure, the dispute about the use of personal data for advertising purposes, and effective competition oversight in a highly complex, technically fast-moving and (to many) opaque sector.
As always, many thanks to our great panel of authors.
Sincerely,
CPI Team
