Commodities, Cocaine and Online Ads

I hear some talk in the market from Publishers and Pub aggregators about "pricing technology" and pricing rules they will use to combat a predicted downward pull in prices that results from automation and RTB.

I am not really sure what these pricing rules will be or how exactly this could possibly work. It seems that marketing and economics might have taken divergent paths on this one. Lets examine the concept of price floors and why they probably cannot be an effective tool to increase revenue for publishers in this case.

A price floor is an artificial price set above the equilibrium clearing price in a market environment. This means that the quantity of a good demanded will decrease by some amount while the quantity supplied will increase. The amount of the change in quantity supplied and demanded will depend on the elasticity of both curves, respectively. In this particular case, this type of mechanism would likely have an adverse rather than benefical effect on revenue for publishers:

1) Elastic Supply- Despite the fact that online ads as a whole are not commodities and as such do not represent a pure example of perfect competition, there is such an enormous surplus of supply in each of the various "value tranches" of inventory that the benefits of differentiation kind of becomes void since collusion at this scale isnt really possible (fragmented across too many pubs). A supply aggregator might argue that unifying the fragmented market is a great reason to choose one platform and create universal and enforeable floors; this brings us to a textbook example of a prisoners dilemma...however in this case, there are too many players in the game to reasonably expect adequate levels of cooperation (and not cheating) to properly execute this scheme. Thus, the publishers become price takers within their niche (if we construct a view of the traffic in 3 dimensions; price, quantity, niche/value tranche and then slice it up by niche/value tranche, we will see a bunch of cross sections where market supply is virtually unlimited at an equilibrium price level).

2) Elastic Demand- Advertisers don't want specific placements as much as addicts wan't cocaine. There are a lot of different supply sources with similar desirability and value in terms of performance levels and/or audience attributes. If a particular publishers is artificially charging too much for a placement, no sweat...a buyer can just go somewhere else to find it at its intrinsic price.

Does the fact that price floors and pricing mechanisms are not the solution to increased revenue mean that publishers are doomed? No, it just means they should embrace the free flow of market dyamics and allow for more transparent information so advertisers are able to target more effectively. The whole point of advertising is to drive a person to buy a particular product or service. If an advertiser is able to cut through the noise and find their targets more effectively, that means they will be willing to pay more for that acquisition and the externality of significant spend going to uninterested users will be reduced (Ie. Publishers with valuable audiences and placements will get the money they deserve and publishers who are lacking in either department will also get what they deserve...good for some, bad for others). In general, the acceptance of a free market in the age of automation will enhance the overall value of the industry rather than act as a zero sum game reallocating the rents. Outcomes are not permanant either, so a pub who is an initial loser can certainly make changes to enrich the value of their audience or placements.

This market is not ideal for price mechanisms.