Online advertising has become a very profitable endeavor for publishers in the Interent. Its growth can be attributed to the rise in popularity of Google’s advertising method through search, and in fact, this industry will continue to rise annually by 12 percent in the coming 5 years. 2008 saw 23.4 billion dollars in overall sales in online advertising. This is the summary of a behavioral targeting article by Jonathan Levin and Paul Milgrom. You can get the pdf of the behavioral targeting article here: Online Advertising: Heterogeneity and Conflation in Market Design.
Online advertising is different from traditional advertising, because it aims to send advertisements to a particular group of people with the same characteristics., in a more thorough manner. To some extent, traditional ads can do that as well, but in very limited capabilities. Search advertising allows one to know exactly what a user wants right away through the keywords one types in a search box. The measurement and targeting capabilities of search advertising makes it highly effective for advertisers and convenient for online users.
Further information can be obtained from a user’s history of searches so that his or her interests can be determined. Clicks on ads can even measure how effective ads are to provide some refinement in the future. Surely, in the future, ads will become more and more targeted and impressions becoming more distinct. But there are disadvantages to having excessively targeted ads, and so the importance of inflation comes into play.
Commodity and Conflation
Commodity is anything that is relevant to a buyer, and the date and location which it will be available. However, this is an incomplete definition because this implies that no two objects are the same commodity, no matter how small the difference is. But in fact, commodities can vary in many characteristics. For example, wheat can vary in terms of weight, cleanliness and composition. If each commodity were sold separately for all its unique characteristics, then this method becomes a very difficult transaction.
One solution for this is standardization. It has a lot of benefits, including reducing measurement costs and selection processes. However, this can also go wrong because grade requirements can mix up and the responsibility of classifying commodities are left in the hands of a few experts.
A better solution would be a sort of toss up between the two. For example, selling diamonds starts with an auction categorizing diamonds into 19 categories, called deals, and each deal is further divided into splits. For each deal, a seller builds a common price through conflation. But while the auction sets a common price, split prices are then adjusted using a precise process where close examination is done only per split, and measurement costs are reduced.
Online Advertising Conflation
Conflation exists in search advertising in the following manner. Bidders have a lot of control as to the keyword they want to bid for, the price per click, and the text ad to be displayed. However, there is conflation in other variables, such as coarse control over keyword match leeway, price variation in page positions, demographics, or by the cookies that describe a user’s browsing behavior. Still, there are price adjustments for click rates depending on quality of the match, among others.
When there is excessive fine targeting, two problems arise. First is cherry-picking among knowledgeable advertisers, and second is the thin market problem. This paper suggest that three major effects need to trade off to have an efficient marketing design. First, finer targeting is a requirement since it prevents irrelevant ads. Second, excessively fine targeting may make safe participation in the market costly, and third, excessively fine targeting may cause monetization problems.
We don’t know yet what will happen to online display advertising in the future. Will the targeting become finer? But this article shows that auctions based on very specific impressions may have costs that are very unfavorable to bot the online publishing and advertising sector.