The Informativeness of Online Advertising

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This paper examines the relationship between the information content of advertisements and the fee structure used to price them. For an advertiser, sending general advertisements with inflationary claims may attract additional visitors with whom it is poorly matched. This is costly for the firm when it must pay for ads on a per-click basis since many of its visitors will not purchase. As a consequence, Dr Taylor argues that perfect information transmission can be sustained under per-click pricing. By contrast, when firms pay for advertisements on a per-impression or per-sale basis, maximum profits are obtained by attracting all consumers with some positive probability of purchase. This feature undermines the ability of advertisers and consumers to communicate under such fee structures by creating an incentive for advertisers to cheat or obfuscate. Consumers benefit from increased informativeness, but distortions introduced by the market power given to advertisers imply that society may be better-off with no information transmission taking place.