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Eureka! Less Billboards, More money.

http://www.tacomaweekly.com/news/view/the_great_billboards_debate/

If you live in the United States, you are pretty well aware that advertising is everywhere. From street corners to ball games, there is always someone trying to sell you something. But, in the city of Tacoma people are getting tired of seeing advertisements everywhere. Residents are calling them “distracting,” or “destroying the natural beauty.” The current owners of the billboard companies, Clear Channel, has firmly stated that they have the right to put up these advertisements in currently zoned areas. But, is there a way for clear channel to turn a larger profit (off billboards), and make the citizens of Tacoma happier? Once again, if we use the concept of networks, more specifically the theory behind “Sponsored Search Markets,” we can clearly and easily see there is a method for Clear Channel to make more revenue off less billboards!

In the city of Tacoma, 38th street currently has 2 billboards located on its north side. One billboard is located at the block of Steele and the other at the block of Thompson. The population of Tacoma is ~200,000 people, and let’s assume 800 cars drive by the Steele block and 200 cars drive  by the Thompson block every hour(Steele is located next to the main mall, hence more cars). As expressed by Sponsored Search Networks, 8 and 2 would be equivalent to CTR’s (click through rates), as the cars represent the number of “vistors per hour” that go past and make an inquiry about the billboard’s message- call or email the contact info on the billboard. This means that 1 out of every hundred cars that drive by the billboards each hour makes an inquiry about what product is being advertised. Now of course Clear Channel has to sell these billboards to companies to make money. Let’s assume company X values each “inquiry” at $10 and company Y values each “inquiry” at $5.

In a normal socially optimal allocation setting, the VCG prices for each billboard would be, Company X would get Steele billboard for $30 and Company Y would get the other billboard for $0. In this situation, both companies would have both billboards up, and the total revenue that clear channel would get would be $30.

But, if clear channel decided to get rid of one of the billboards, there would then be more competition for the only remaining billboard. This would also get rid of half of the billboards on 38th street, making the citizens of Tacoma much happier. Suppose, clear channel did get rid of one of the billboards and decided to run a second price sealed bid auction for the only remaining billboard on 38th street? It would turn out that Company X would end up purchasing the remaining billboard at $40! (a profit of $10 more) But, how does this work? Can this actually be true?

In fact, with a simple use of matching markets, it can easily be shown that Clear Channel can make a larger profit with less billboards. Let’s say that the “CTR’s”, in this case 8 and 2, are = to ra and rb respectively. Let’s also say that the original value’s that company X(10) and Y(5) have for the billboards slots are vx and vy respectively.

If we take a look at this situation we can see that ra>rb and vx>vy. (8 > 2 & 10> 5) That being said ra*vx > rb*vy.(80>10) In the first scenario, we have ra*vy-rb*vy=$(revenue).  By the rules of VCG, we take the difference in possible profit Y would have had in A instead of getting B(40-10)=30. That $30 is the price that X will have to pay in order to “outbid” Y. In scenario 2, since vx>vy (10>5) we have ra*vy=$(revenue). We know the final price (and price paid) is going to be when the person who started out with the lowest value(y), reaches 0. Since Vy started out lower than Vx, we know that Vy’s true value is going to be the price Vx pays for the slot. To continue, since rb>0&vy>0, we know that rb*vy is going to be a positive #. Therefore: (ra*vy-rb*vy) < (ra*vy). Hence, $30 < $40.

Eureka! There is a way for both the citizens to be happy and for Clear Channel to make a larger profit. By following some of the basic rules of Sponsored Search markets both the citizens of Tacoma and the Clear Channel Corporation can have a happy ending. Although the citizens of Tacoma may never fully get rid of Billboards in their city, by using the power of a simple VCG calculation and the theory behind second price sealed bid auctions, they can make their case for a more “beautiful” metropolis.

Comments

One Response to “ Eureka! Less Billboards, More money. ”

  • Kyle Alm

    Advertising is meant to drive sales as a goal but there are benefits to branding also. In fact several of the online advertisers (Google, Facebook and the rest) also bid by the impression.

    It’s unclear how online advertising puts money in the pocket of the city as opposed to billboards.

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