The Informativeness of On-Line Advertising
Posted: 30 May 2009 Last revised: 23 Mar 2012
Date Written: May 29, 2009
Sending general advertisements with inflationary claims may attract additional visitors with whom an advertiser is poorly matched. This is costly when ads are priced per-click because many visitors (clickers) will not purchase. This renders per-click advertising particularly conducive to the transmission of information via ads. The admissibility of information transmission depends not only on advertiser behaviour, but also upon consumers' interpretation of and trust in ads. In less conducive environments, consumers quickly learn to place little stock in the claims they see advertised. This mechanism undermines the ability of advertisers and consumers to communicate under per-impression or per-sale fee structures. 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.
Keywords: advertising, obfuscation, search, pay-per-click, pay-per-sale, sponsored search,cheap talk
JEL Classification: L15, D02, D83
Suggested Citation: Suggested Citation