Is Online AD Space a Commodity?

I just started reading Alvin Roth’s book “Who gets What - And why?” and it already got me thinking. The book discusses the principles of markets and market design using various examples. One starting point is the transition of markets into being commodity markets. Simplified; in a commodity market all products sold are equal (think: stock markets), hence only the price is a relevant criteria for the buyer/seller. Alvin exemplifies the transition of products into being a commodity with the (Ethiopian) coffee beans market.

One way to cheaply harvest coffee beans is to harvest the whole hillside at once, even beans that are not ripe yet. Adding non-ripe beans to the batch reduces coffee quality which can only observed by the potential buyer by repeated, costly sampling (grinding, brewing and tasting). Before 2008, coffee beans were not a commodity as each buyer sampled from a potential seller to ensure quality (that the amount of non-ripe beans was limited). In order to reduce the time-consuming sampling, buyer relied on established seller relationships. In 2008, this changed with the introduction of the Ethiopian Commodity Exchange which employed blind-folded testing and rating of each batch of beans sold. With external verified quality ratings the market shifted from a buyer-seller relationship to a commodity market.

Is Online AD Space Market a Commodity Market?

There are at least two ways to look at it. First and most obvious the market already uses the technology and terminology of a commodity market. AD exchanges and real-time buying processes are all built on the assumption that the product (ad space or user attention) is standardized. And this is the case for certain properties like AD specification (like AD format and AD size). Potential seller can increase their revenue, by adding ADs with low visibility (e.g. banner at the bottom of a page) or by adding dubious web traffic. Both obviously reduces the AD space quality, just like adding non-ripe coffee beans to the batch.

Comparing the AD space market to the previous beans example, the AD industry is in a setting without a (Ethiopian) centralized clearing house. Why? There is no external, centralized control institution ensuring AD quality. This means that each buyer needs to employ several costly tech. providers to ensure visibility of ADs and protect against AD fraud. Each buyer needs to continuously sample what AD space they are actually getting. Hence, “AD exchanges” are providing just the matching of buyers and sellers. They do not take the responsibility to standardize the product.

In a nutshell, the AD industry moved to being a commodity market without ensuring the basics: the quality standardization of ad space (beans). I wonder what Alvin would say to such an approach.

Written on June 12, 2016