Programmatic Ad Buying
SOURCE: https://adexchanger.com/data-driven-thinking/lemon-markets-marketplace-crashes-lessons-programmatic/
“Programmatic” ad buying typically refers to the use of software to purchase digital advertising, which is more efficient than using human salespeople. In past years, Programmatic has faced criticism for its lack of transparency and fraud issues. One of the biggest issues is the novelty and complexity of automated buying technology. New tools are launched constantly, which can leave buyers feeling overwhelmed. There is a significant information asymmetry between sellers and buyers, creating a phenomenon referred to as a “market for lemons.”
The lemon-market example we looked at in class refers to used automobiles. In this example, the seller knows about the quality of the offered car, but the buyer does not. The buyer bears the risk of getting a lemon (analogous to a defective car) as opposed to a peach (analogous to a high-quality car). The knowledge gap between buyers and sellers has consequences for market dynamics. Suppose a high-quality car is worth $2000 and a low-quality car is worth $1000. Since the buyer does not know the value of the car, they will bid about $1500 to avoid overpaying. Thus, it would not make sense for the seller to sell a high-quality car. The only way for the seller to make a profit is for them to sell a low-quality car, also known as a lemon. This creates a cycle where more lemons are sold and buyers continue to adjust their expectations and lower their prices.
Without intervention, the amount of lemons can reach a dangerous level. At this point, the market collapses because nothing good is being offered anymore. An obvious solution would be to enforce transparency and legal warranties that reduce buyers’ risk of being left with lemons. We should also strive to educate advertisers about programmatic ad trading to further lower the information asymmetry between buyers and sellers.