ONLINE ADVERTISING AND ANTITRUST

NETWORK EFFECTS, SWITCHING COSTS, AND DATA AS AN ESSENTIAL FACILITY

One of the fastest changes in the digital economy has been a shift in the approaches of many governments towards the government, from the emphasis on protecting consumers from allegations of misleading advertising to considering digital advertising in the context of antitrust discussions and policies. They are in the sights of the antitrust authorities, it is important to investigate where their market power comes from (if any). Critics argue that a combination of network effects, switching costs, and access to large amounts of data would provide an economic explanation for the emergence of digital advertising platforms and that the combination of these factors means that such markets do not automatically correct themselves.

NETWORK EFFECTS ON ONLINE ADVERTISING MARKETS

Network effects occur when the value of a product depends on the use of the product by others. The network effects can be on the same side; there is a performance advantage for users because multiple users of the same type use the network, as is the case with a social media platform. Network effects can also be mentioned when a group of users (such as content viewers on YouTube) prefers another group of users (such as people who create content on YouTube). Network effects are a potential source of market power in online advertising, as they imply that larger companies can have broader network effects and therefore have increasingly attractive services. This can strengthen the mandate and make it difficult for new companies to challenge them.

SWITCHING COSTS IN ONLINE ADVERTISING MARKETS

Change costs arise when it is expensive or difficult for users of a service to switch to a cheaper alternative. Relocation costs can increase the burden, making it more expensive or more difficult for new participants to attract consumers from existing suppliers. In platform markets, such as online advertising, the most important question is whether the cost of conversion makes it likely that advertisers will stop using ad platforms or switch platforms if it can provide a higher return on investment. In general, in digital markets, we’ve seen users switch platforms as they go beyond the cost of their data (or try to convert it to a new format). Therefore, it is often questionable whether the advertiser’s data already integrated into the online advertising platform is valuable enough to make the advertiser hesitate. Unlike other markets, historical ad performance data is often of little value simply because advertising is a tactical and ephemeral part of business strategy. This contrasts, for example, with medical records, where it is very useful for patients or for a hospital to have access to historical data. Because of this flexibility, many technologies, known as cross-channel attribution technologies, have evolved exactly to facilitate the exchange of advertisers between platforms. These platforms provide dashboards that allow the advertiser to measure exactly how spending in a particular place to reach the eyes affects conversion and profit. Recently, the emergence of digital television and radio and the expansion of tracking capabilities have made it possible to extend these services to offline advertising as well. Other services also offer the potential for real-time optimization, in which the software automatically adjusts ad campaigns to focus on inventory that offers the highest return on investment.

KEY DATA AS ESSENTIAL ACCESS (STRUCTURE) FOR ONLINE ADVERTISING MARKETS

The data has revolutionized online advertising by allowing platforms to “target” consumers who are likely to respond to an ad with the right ad at the right time and then measure its effectiveness. The transformation of the online advertising industry has been credited with digital data, so a natural question is whether stock of consumer digital data can become an essential asset in these industries.

  • Is the data valuable?

Unsurprisingly, the answer to whether the data is valuable for targeting online ads depends. Perhaps most surprisingly, the answer is that the data created by users while searching the Internet is generally not so valuable. Perhaps the best general approach, when analyzing the value of data in online ads, is to assume that most online ads are ineffective because they are simply ignored by consumers. In my research, I documented that, even with very low effectiveness limits, more than nine out of ten ad campaigns achieve nothing.11 As a result, the right data can significantly improve ad performance, but only because of the underlying assumption that Online advertising is quite inefficient.

  • Are there alternative data sources in the advertising markets?

The key to exploring alternatives to consumer data that major ad platforms can access is to understand what role data plays online. To understand this, it is useful to consider two possible ways in which online advertising influences consumer behavior. The first way to influence consumer behavior is to activate consumer awareness. It may be the recognition of a brand or a new type of product that solves a consumer problem. The second way in which advertising can influence the consumer behavior of consumers who are already aware of their needs is by informing them about the different alternative suppliers to meet those needs.

FINAL THOUGHTS

In general, the discussion about the market power of online advertising is remarkably inaccurate. Commentators talk about network effects without specifying whom they want to apply network effects to or why. Commentators talk about how online platforms are being “fixed” and are not sure if this is appropriate for advertisers or users. However, this precision is necessary to conduct a meaningful discussion about sustainable sources of competitive advantage in the online advertising markets.