Is Online Media “A Market for Lemons”?

I recently read Akerlofamp8217s paperamp160Market for Lemonsamp160which earned him a Nobel Prize in Economics and while I have issues with some of his purported solutions to the problems identified it is worthwhile to apply much of his analysis to the online media marketAkerlof used the example of a used car lotamp160where cars on the lot are usually of lower quality called amp8220lemonsamp8221 He postulated that if you had a great car in perfect condition you would not likely place it on a used car lot Why Because there are so many lemons in the lot and purchasers have a hard time telling the difference between amp8220chalk and cheeseamp8221 as the British like to sayIf purchasers cannot tell the difference between the quality cars and the lemon cars they will treat the quality car as if it was a lemon amp8230 thus quality is driven out of the market A seller can yell at the top of his lungs amp8220But my car really is betteramp8221 but few buyers can discern the difference This shares similarity with another economic principle called Greshamamp8217s Lawamp160where bad money drives out good money That has in fact happened in the US where 90 silver coins minted prior to 1964 rarely circulate because people hold onto those and would rather spend the hybrid coins with copper in them post 1964 A silver quarter minted from 19321964 is worth approximately 275 melted down and this is why you are not likely to buy a pack of gum with itFor those outside the industry the buyerspurchasers in the media industry are marketers or advertisers those who actually buy the banner space I sometimes refer to them as the amp8220suckersamp8221 The sellers are websites publishers online ad networks and programmatic technology companies I often refer to this collective as the amp8220fraudstersamp8221We are now ready to answer whether or not the online media market is citruslikeAsymmetry of InformationWhen media buyers purchase media rarely do they know where their ads are placed or in what context Have you ever succumbed to a click bait headline like amp822020 Celebrity Photos You Wonamp8217t Believeamp8221 and then be treated to 20 slides of photo after photo Each photo has advertising surrounding it and of course even below the fold has ads servedNot only are those amp8220below the foldamp8221 ads not seen by audiences and paid for by sucker advertisers but how valuable do you think those above the fold ads are next to the photo on say the seventh photo The amp8220valueamp8221 is so close to zero it is not worth calculating amp8230 yet some hapless advertiser spends money to purchase that garbageIn another advertising scenario have you ever read an article on your smart phone and scrolled with your thumb Of course you have And did you ever accidentally click on some link with a clumsy thumb that took you away from the article Maybe inadvertently clicked on an ad Now what do you think that inadvertent click was worth to the advertiserI will once again say the value is so close to zero it is not worth calculating Yet the same sucker is paying for that worthless click Even worse the sucker pays for that worthless impression that led to the worthless click See a pattern hereamp8220Few buyers can accurately assessamp8221 the quality of what they are purchasing Sellers know what they are doing Classic asymmetry of informationSeller Incentive for Selling GarbageThis is almost rhetorical If the buyer cannot tell the difference why would publishersmedia sellers go out of their way to sell quality impressions Can they get a premium for it The actual course for the industry is to commit fraud It is estimated that 33 of all online ad impressions are fraudulent and this could only happen if there was an incentive to do so and buyers could not tell the difference And what is the cost of fraud Akerlof gives his answeramp8220The Lemons model can be used to make some comments on the costsamp160of dishonesty Consider a market in which goods are sold honestly oramp160dishonestly quality may be represented or it may be misrepresentedamp160The purchaseramp8217s problem of course is to identify quality The presenceamp160of people who are willing to offer inferior goods tends to drive theamp160market out of existence amp8211 as in the case of our automobile amp8216lemonsamp8217amp160It is this possibility that represents the major cost of dishonesty foramp160dishonest dealings tend to drive honest dealings out of the marketamp8221Disclosure Mechanism or TechnologyOne would think with todayamp8217s technology that this would be simple right Well fraudsters also have technology And since there are over 90 million active websites in the US alone it is not practical to monitor the placement of every banner Networks that cobble together the multitude of seller websites are not interested in monitoring eitherThe Continuum of Quality and Buyer ExpectationsBuyers are now clued into the fact that online fraud is a problem So what many do is to factor in low quality and fraud into their media expenditures This actually increases fraud over time It is one way that sellers stay ahead of suckers by doubling down on fraud and low quality ad placements on pages Remember buyers cannot tell the difference between amp8220chalk and cheeseamp8221 so sellers just serve suckers more chalkDeficiencies in Effective Quality AssuranceThe online media ecosystem has a trade organization called the IAB Internet Advertising Bureau that develops amp8220standardsamp8221 All but a delusional few know that this is a joke Who subsidizes this trade organization With 33 fraud they are not a credible guarantor of quality One way the industry has tried to further bamboozle the suckerbuyer is to lower the bar as to what constitutes amp8220qualityamp8221 The details are more than what is necessary for this article But suffice it to say fraud rates continue to escalateI think after reviewing Akerlofamp8217s paper it is clear that the online media market is indeed a amp8220Market for Lemonsamp8221 This market is propped up by billions of dollars of sucker VC money that is put in the hands of sucker media buyers and put into the coffers of fraudsters This amp8220market for lemonsamp8221 becomes eminently clear to anyone spending their own money to purchase banners With OPM Other Peopleamp8217s Money the lemon market will continue to growIs there a way out The answer is a qualified amp8220yesamp8221 but that must wait for the next missiveThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillageMyersBizNet management or associated bloggersamp160

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Is Online Media “A Market for Lemons”?

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Jaffer Ali

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