Humane Economics

Some thoughts, by Baldur Bjarnason, on the economics of insubstantiality, free and digital markets.

The argument here might sometimes get a bit involved but, I hope, still accessible and clear. Enjoy and let me know what you think.

If you're new here and want to get to know this blog, it'd be best to start with all the posts in chronological order. You don't have to read them all, just scanning over them will give you a good idea of my stance, perspective and argument.

24 July 2009

Terminal Advertising

Online ads suffer from serious structural issues that threaten the viability of the entire market.

Children, teenagers, vibrant, happy and bouncy young adults and economists all have in common an assumption of permanent good health, mental or physical. It’s just one of those things you count on without thinking, until you can’t. You never foresee the possibility of spending your entire summer vacation bedridden with the flu. Your vision of yourself in the future doesn’t include a decades’ long battle with a bad knee, a career plagued by repetitive strain injury or being dogged by depression.1

Good health is implicit in all of our models of the future, especially our economic models, and yet it is the single thing after job loss that is most likely to badly affect our future finances. We assume our own health, the health of our family, the health of our co-workers, and of everybody who surrounds us in our towns and cities.

We also assume that our markets are and will be healthy, although it’s been clear in economics for a long, long time that markets can become unhealthy, sick and, for all intents and purposes, die.

The best formulation and model for the health of markets was put forward by George Akerlof in his seminal 1970 paper “The Market for Lemons”2. In it he described how a healthy market can become unhealthy or a ‘market of lemons’ to use his terms.

It’s a very simple idea (with bonus points for being somewhat common sense): If you have a market that has a mix of good products and duds (‘lemons’) and the buyer has no way of telling a dud from a non-dud, the sellers of ‘lemons’ will drive the sellers of good products out of the market.

Because of the information asymmetry, the buyers have to buy the good to find out whether it is a dud or not, the prices they’re willing to buy at will reflect that risk and be correspondingly lower. Some of the sellers of good products can’t sell their products for what they’re worth and so won’t participate in the market. The number of good products in the market goes down, risk goes up, prices go down, more sellers of good products leave. The cycle continues until either some sort of rock-bottom equilibrium is reached or until no product, dud or non-dud, can be sold in the market for any price.

The market dies. The cause of death is information asymmetry and a mix of bad and good products in a single market: the buyer has to buy to find out if the product is any good.

The online ad market is highly competitive and the prices are strongly trending downward.3 That’s all par for the course4 in a competitive, free market, but the sellers of advertising inventory (ads on the page) are in denial of the overall health of the market.

It’s no secret among us who work in marketing that the only way to find out whether an ad venue is effective is to buy ads and then measure the effect. The statistics and traffic information you have access to before you buy are irrelevant noise. Traffic stats are indistinct goops of unusable nonsense that have no relationship to whatever the actual results or what the return on investment will be.

It’s even less of a secret that most of the ad inventory out there is absolute garbage, blog content being almost as notorious as ‘user-generated-content’.

So, that’s a pretty bad cough they’ve got going there.

Given the characteristics of the web advertising industry, the behaviour and secrecy of the behemoths selling the inventory and the overall measurability of the utility and (in)effectiveness of online advertising, anybody planning on basing their business on online advertising will see their livelihood caught up in the industry’s overall terminal decline.

The only way they can avoid that fate is if they specifically take measures to overcompensate for the bad health of the market in general and work hard to differentiate their ‘product’ so that the competitive forces of the market don’t tear them a new arsehole.

But wait … it could be even worse …

  1. Mental health is something you have to nurture and take care of, just like your physical health, y’know, especially if you’re in a high risk demographic due to family, orientation and social status. ↩

  2. Available in PDF form here and it’s a great read. It’s also the reason he won the ‘Nobel’ prize for economics. There isn’t actually a Nobel prize for economics, and half the theorists that get this ‘Nobel’ are blatantly disconnected from reality, but apparently there’s money awarded, so Akerlof can be happy either way. It was also rejected by most of the journals it was first submitted to. Probably because it goes over the economics paper allotted allowance of common sense. You can read a personal essay of Akerlof’s on the writing of the paper here (not PDF for once). ↩

  3. Blame facebook, ‘user-generated-content’, or crappy blogs if you don’t believe in economics or free market competition. ↩

  4. A golf-based figure of speech being apt in the MBA/idiot manager dominated marketing and advertising industry. ↩

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Baldur BjarnasonBaldur Bjarnason has a BA, MA and PhD in literature and interactive media (specialising in structure and experience design). He lives in Bristol, UK and works in web development, research, design and marketing.