Can Lessons From Open Markets Help Solve RTB’s Trust Deficit?

Originally published in AdExchanger

Programmatic advertising’s trust deficit is on the verge of becoming an inescapable conversation. As the chorus rises around issues of quality, accountability and transparency, the clarion call to the industry is clear.

The lack of trust can best be understood as an absence of information symmetry, which is an essential pillar in business transactions. Put simply, symmetry ensures every party gets a fair deal.

The information asymmetry and imbalance of power that results from transactions can be illustrated by the “Market for Lemons,” a concept of market operations from economist George Akerlof, whose groundbreaking research won him the 2001 Nobel Memorial Prize in Economic Sciences. For the RTB market, the “Market for Lemons” can be a recipe for disaster.

The Market For Programmatic Lemons

In a market for lemons, buyers can’t distinguish between high-quality and low-quality products because of insufficient information. As a result, they offer the same price for both products. This inevitably drives out higher-quality products because their production and successful distribution cannot be sustained at the discounted price offered by buyers. Unchecked, a lemon market eventually degenerates to the point of collapse.

Applying Akerlof’s theory to RTB, an open ad exchange market is a mixed bag of high-quality and low-quality impressions. Information asymmetry plagues the market because buyers cannot access the relevant information that would help them identify critical variables, such as ad environment, ad performance and brand safety. As a consequence, buyers cautiously offer blanket average pricing for all the impressions in the market.

This drastically undermines premium publishers and leads to their withdrawal because their high-quality inventory cannot be sustained in such a market. This pullout causes another ripple as buyers revise their pricing further downwards in view of an even lower-quality impressions market. The final result is a market where the “bad drives out the good,” as described by Gresham’s Law.

Addressing the Trust Deficit

Substantial research in academia suggests information asymmetry must be addressed at its root cause. Essentially, if only the seller knows whether their inventory is high-quality or low-quality, unsuspecting buyers are vulnerable to exploitation.

Potential solutions include signaling, when the better-informed party credibly conveys its quality information to the other side, and screening, when the uninformed use third-party information when assessing a transaction. These principles can be seen applied to other open markets to promote quality and improve transparency.

Online Markets

Online markets, particularly ecommerce marketplaces, faced shrinking confidence from buyers because of the “Market for Lemons” phenomenon. To address this issue, rating systems were introduced to identify high-quality inventory and sellers. EBay, for example, began rating its sellers based on shipping charges, speed of delivery, communication and the accuracy of product descriptions. Additionally, eBay imposed scores that had to be met for sellers to qualify among the top tier. Once marketplace conditions and quality improved, buyers showed greater willingness to pay for online goods and services.

Credit Markets

Underdeveloped credit markets often reflect the “Market for Lemons” principle, where no standards exist to determine the creditworthiness of the borrower.

To raise money in capital markets, corporations and governments borrow money directly from investors by issuing bonds or notes. Investors purchase these securities expecting to receive interest plus the return of their principal.

Credit rating agencies, such as Standard & Poor’s, brought transparency into the market by screening and analyzing the credit risk of issuers. Credit ratings are mostly based on mathematical models, complimented by analyst and industry expert opinions. Factors include asset quality, funding and profitability. These metrics are based on signaling data provided by issuers such as financial statements and regulatory filings. Credit ratings reflect the ability and willingness of an issuer to meet its financial obligations and can build (or erode) investor confidence in purchasing bonds and notes issued by these entities.

What’s The Lesson For RTB Markets?

Buyers have increasingly become skeptical when investing in programmatic ad buying because they’ve been bilked by one too many lemons.

To rebuild trust and establish confidence in the market, suppliers, in association with other players in the industry, must take tangible steps. A combination of signaling- and screening-based solutions can help establish that trust. Sellers, for example, can disclose information about their inventory source and quality using standard frameworks. Screening of inventory and suppliers helps further reduce information asymmetry, based on unbiased third-party assessment. This enables buyers to purchase inventory with confidence and helps sellers demonstrate their network quality.

This effort will help prevent many lemons, including ad fraud, questionable inventory and malware, from filling up the exchanges and driving away the good.