The Value of Attention Retention
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Description

Adverts are a patently visible component of the online world, telling us what music, books, films, and other products we should be buying. Increasingly, advertisers are targeting adverts at specific consumers, based on their knowledge of consumer browsing behaviour and past spending patterns. This ability to precisely target advertisements based upon past behaviour and individual character traits represents a key advantage of the Internet over older media that must use a one-size fits all approach to advertising. Quick to recognise this potential, advertisers and publishers alike have flocked online - making the online advertising market a crowded and dynamic competitive environment. An important policy question, then, is how to disentangle from this competitive maelstrom those factors that affect the prices of averts and of consumer goods. Economic theory can help here. This image summarises an economic model of advertisement targeting and consumer avoidance, and shows how these factors can interact to drive advertisement prices either higher, or lower.

At one extreme (right-hand side of the image), if consumer targeting of adverts is completely inaccurate, then the adverts will be of little value because they are almost never impressed on consumers who are interested in the actual advertised product. From this starting point, an increase in targeting accuracy (moving towards point A in the figure) means that advertisements start to match consumer interest more frequently — resulting in an increase in the value (and price) of those ads. As targeting accuracy increases yet further, another effect starts to take hold: the targeting technology results in multiple firms competing to sell the same products to the same (likely interested) consumers. These multiple exposures increase competition between advertisers, forcing them to reduce the prices of their products, which ultimately applies a downward pressure on ad prices.

Advertisement publishers (such as news sites) who generate revenue from advert sales, and who therefore have an interest in keeping advert costs high, have a weapon to protect against this downward pressure. Heavy investment in good content attracts large shares of consumer attention, so the publisher can offer its advertisers a degree of exclusivity over access to that attention and, in so doing, protect them from competition by rival firms advertising elsewhere (point B; the cost of adverts therefore increases). When most consumers either ignore, block, or otherwise avoid advertisements, however, the returns on such investment are low, so publishers implement only modest increases in content quality after an increase in targeting accuracy. The result is that, for sufficiently high levels of advert avoidance, increasing targeting accuracy eventually causes advert prices to fall (point C in the image).

Emerging empirical results lend credence to this line of reasoning. We know from Rauch (2011) that consumer goods prices are remarkably sensitive to the extent to which consumers are exposed to informative advertisements, from Sun and Zhu (2011) that publishers make content decisions in response to incentives in the market for advertisements, and from Goldfarb and Tucker (2010) that targeted advertising is a highly effective way of communicating with consumers. For further discussion of this model, see Taylor (2011).

References

Author(s): Dr Greg Taylor
Published: November 2011
License: © Greg Taylor
Data Source: -
Tools: Wolfram Mathematica
Tags: advertising, content, prices
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