Signaling Through Advertising When Ad Can Be Blocked

49 Pages Posted: 17 Jun 2019

See all articles by Yuxin Chen

Yuxin Chen

New York University (NYU) - New York University (NYU), Shanghai

Qihong Liu

University of Oklahoma - Department of Economics

Date Written: June 6, 2019

Abstract

The advance of ad-blocking technology is expected to have profound implications to the advertising industry. This paper makes the first attempt to understand the impacts of ad blocking on consumer’s ad avoidance and optimal reactions by advertiser and ad platform while the primary role of advertising is to signal quality. We extend the standard models on ad signaling to the context of ad blocking. Our model incorporates both ad-production cost and ad-distribution cost, and allows ad quality (ad production) to impact consumers’ nuisance costs. We find that, counter-intuitively, a lower ad blocking cost may result in fewer consumers blocking ads and higher profit for the advertiser. This is driven by the signaling function of advertising. In particular, the ad platform reacts to lower ad blocking cost by lowering the unit ad-distribution cost it charges, forcing the advertiser to spend more on ad production because ad-distribution cost alone is insufficient to signal product quality. The high ad-production cost may offset consumers’ disutility of ad viewing and result in fewer consumers blocking ads when ad blocking becomes less costly. We also confirm the robustness of this insight with various model extensions and discuss the implications of our findings.

Keywords: Ad Avoidance, Signaling, Advertising Strategy

Suggested Citation

Chen, Yuxin and Liu, Qihong, Signaling Through Advertising When Ad Can Be Blocked (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3399883 or http://dx.doi.org/10.2139/ssrn.3399883

Yuxin Chen

New York University (NYU) - New York University (NYU), Shanghai ( email )

1555 Century Ave
Shanghai, Shanghai 200122
China

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

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