The Online Advertising Industry: Economics, Evolution, and Privacy

David S Evans
Journal of Economic Perspectives

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fulltext The advertising intermediary can implement such decisions almost instantaneously and then insert an ad into advertising space on the page that the target is viewing. The advertiser would typically pay a premium over standard 50 Journal of Economic Perspectives online advertising rates for views by these targeted individuals because of the increased likelihood that they will “convert” the view by this “qualified prospect” into a sale. 50-51 on 6/3/2019, 3:35:03 PM

excerpt Unless behavioral targeting is sufficiently precise, advertisers may prefer to reach a larger group of individuals. Reaching 10,000 people of whom 1/1000 (or 10) will ultimately purchase a product is better than reaching 2,000 people of whom 1/500 (4) will ultimately purchase the product. There is a tradeoff between precision and reach. Precision is limited by the amount and quality of data that are available. ... Second, the advertising platform that implements a behavioral targeting campaign must have access to a large enough universe of viewers to make the campaign worthwhile to the advertiser. There are fixed costs of designing and executing advertising campaigns; the advertiser needs to make enough sales to recover these costs and make a return. 51 on 6/3/2019, 3:36:42 PM

excerpt Online advertising methods pose a serious threat to traditional methods for several reasons. First, they increase the efficiency of matching buyers and sellers and delivering advertising messages to the buyer, which over time should reduce the economic importance of traditional intermediaries such as advertising agencies, media buyers and sellers, and direct sales forces. Second, online providers increase the supply of advertising inventory significantly. During the 2000s, new content providers have included user-generated video sites such as YouTube, social networking sites such as Facebook, and blogs such as Huffington Post. Americans viewed more than 458 billion web pages in 2007, each of which could have carried advertising and many of which did. 53 on 6/3/2019, 3:38:18 PM

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