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Pay Per Click Advertising, Asymmetric Information, and Moral Hazard

Pay Per Click marketing, or PPC, is a method of advertising that has rapidly gained popularity in recent years. It’s a system by which advertisers’ websites are placed in designated regions of web pages, commonly on search results and different social media outlets. In exchange for this placement, the advertisers pay a fee every time the site’s users click the link. This allows websites such as Google, Facebook, and YouTube to generate massive amounts of ad revenue while also creating a new, high traffic segue for a firm to market its goods and services.

While the possibility for financial and advertising success is quite clear, the introduction of this new and changing technology allows for the emergence of issues between the advertising firm, the customer, and the relevant website, the supplier. Websites such as Facebook and Google have developed highly technical and specific analysis methods for determining prices of clicks and placement of ads. Thus, there’s clear opportunity for these suppliers to exploit the asymmetrical information and engage in moral hazard. In other words, Google has full access to the data that determine the placement and price of advertisements on their search results, and the success of respective ad placements. Firms who wish to engage in these advertising practices do not have equal access to these data and thus may be taken advantage of or treated unfairly.

With this clear possibility for exploitation, court cases and lawsuits between tech companies and the advertising firms have not been uncommon since the introduction of PPC. For example, various marketing firms claim that Google deliberately placed their advertisements on websites with less traffic that are typically only visited due to an error by the internet user. Google allows PPC marketing on its error websites – commonly reached due to a typo in the URL – or its parked domains – identical replications of a different website. It’s clear that these programs are less attractive to potential marketing firms than programs involving the primary search result pages. Even further in the case against Google, the advertising firms are claiming that being placed on parked domains “could damage their brands.”

This lawsuit was initiated in 2012 and 3 California judges recently reopened the case to investigate whether or not Google misled the marketing firms. After siding against Google, the marketing firms proposed possible restitution calculation methods. One of these methods was the “Smart Pricing Approach,” which attempts to rectify the issues of asymmetric information and moral hazard. It essentially sets marketing firms’ bids at the bid that would have been made given access to all of Google’s data.

This lawsuit, and suits similar to it, bear direct relevance to the PPC coursework in ECON 2040 Networks. For example, proper analysis and interpretation of advertisement prices and the predicted amount of clicks, as well as effective communication of this information, would more appropriately balance information and minimize exploitative practices by firms like Google and Facebook. This involves groups of advertisers properly conveying their values for various ad spaces, determining a method by which the ad spaces are auctioned to advertisers, and searching for market clearing prices that would maximize utility for the advertisers and sellers.


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