49 Pages Posted: 18 Jan 2018 Last revised: 10 Apr 2021
Date Written: March 7, 2021
In recent years, ad blocking has become a significant threat to advertising supported content. Adblockers typically negotiate with publishers, allowing some ads to go through in return for a payment, a practice called (partial) ``whitelisting'' in the industry. Ad blocking has a direct positive effect on consumers by reducing advertising intensity. On the other hand, the practice clearly hurts publishers and reduces their incentives to invest in content quality. Lower content quality, in turn has an indirect negative effect on consumers. This paper builds an analytic model to explore what the net impact of ad blocking on consumers is, how it depends on various market characteristics and how uniformly it affects consumers. The results show that, under a broad set of market conditions, total consumer surplus and even total welfare decline under ad blocking. While some consumers are always better off with an adblocker, for the average consumer, the impact of quality decline is larger than that of ad reduction. The analysis highlights the detrimental role of adblockers' current revenue model - in which value is created for the consumers but it is captured from publishers - in decreasing quality, consumer surplus and total welfare. Analyzing the impact of varying levels of negotiation power between the adblocker and publisher reveals that full negotiation power is not preferred by the adblocker. A lower negotiation power allows the adblocker to commit to less value extraction from the publisher, thereby leading to higher content quality. Additional model extensions show that the main results are robust. In the case of multiple publishers with different levels of competition between them, the strong negative effect of ad blocking on quality holds.
Keywords: Digital Advertising, Ad Avoidance, Expropriation, Consumer Protection
JEL Classification: C72, D18, D21, L14, M37
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