Revealed Preference and Welfare Considerations in Online Advertising Markets

We consider how textbook economic techniques should be applied in online advertising markets. We argue that the necessary conditions for revealed preference theory fail for most advertisers, due to incentive misalignments, ambiguity about available advertising opportunities, and fundamental challenges in estimating causal advertising effects. We also argue 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, we argue that revealed preference theory can apply to consumers and creators with appropriate model specification.

By Kenneth C. Wilbur^[1]

Multi-sided platforms enable customers to exchange scarce resources like money, time and attention for products, services, information, entertainment, and other goods. Online advertising markets, in particular, facilitate exchanges of attention, entertainment, advertising and money between advertisers, consumers and creators.

Multi-sided platform markets continue to evolve, with new technological capabilities, user behaviors, pricing models, competitive dynamics, and other related topics. The academic literature is following that evolution, developing new theories, models, and findings.

This article briefly reviews a policy intervention in an important advertising market which may have mischaracterized the relevant welfare criteria. We discuss online advertiser welfare consid