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The Ad-Tech Bill That Breaks Up Online Advertising

The Ad-Tech Bill That Breaks Up Online Advertising

The Competition and Transparency in Digital Advertising Act (S.4258, a.k.a. “CTDA”) is the latest Senate antitrust bill targeting Big Tech. It seeks to break up the digital advertising industry by targeting companies that process more than $20 billion in digital ad transactions per year. The bill allegedly removes conflicts of interest in the ad-tech market by prohibiting digital advertising companies from participating in both the demand and supply sides of the market. In other words, targeted ad-tech companies would no longer have the ability to act as brokers for buyers or sellers of ad spaces while simultaneously owning the exchange where ad spaces are traded.

Why such a prohibition? The bill claims its provisions remove the alleged conflicts of interest of ad-tech companies’ dual position. Despite the claim that such conflicts of interest harm competition and consumers, the dual position for an operator of a two-sided platform is justified.

The two-sided digital advertising market significantly reduces transaction costs for advertisers and publishers by holding real-time auctions in a single location that allows publishers to sell their advertising space and advertisers to find and buy spaces. The network effects present in large two-sided platform further decreases transaction costs as more advertisers attract more publishers and vice versa. This increases the likelihood that an advertiser will find a publisher that fits their budget, and a publisher will find an advertiser that offers a competitive price. As a result, large companies—such as those processing more than $20 billion in digital ads—contribute significantly to the economy by decreasing search costs for buyers and sellers. As economists David Evans and Richard Schmalensee assert, these platforms “create value for these customers that they could not readily obtain without the coordination.”

Decimating the two-sided digital advertising market would not only undermine economic efficiency, but it would also set digital advertising back 30 years, forcing publishers and advertisers to blindly search for one another as they did in the 1990s. The economic inefficiency stemming from higher search costs is further exacerbated by a poor allocation of resources, as seen by the excessive unsold ad spaces and high prices during that period.

Unfortunately, the CTDA would not only increase transaction costs for advertisers and publishers but would also increase the costs for everyday consumers. When advertisers have to search multiple companies for ad space instead of just going to a few designated platforms, their overall cost to advertise would increase. When the overall costs of companies using digital advertising increase, they would have no choice but to pass the increased costs onto consumers, resulting in higher prices for products and services.

The CTDA seems to ignore the economic benefits of two-sided digital advertising platforms and the procompetitive nature of these markets. In Ohio v. American Express, the Court asserted that “only one market should be defined” in two-sided platforms because these platforms are constrained in the price that they can charge. The value of a two-sided platform depends on how many buyers and sellers participate in the platform. Thus, these platforms are “sensitive to the price they charge each side”; otherwise, they risk a “feedback loop of declining demand” where buyers and sellers leave the platforms resulting in the platform’s loss of value.

The two-sided digital advertising market is not an exception to the two-sided platform economics explained in Ohio v. American Express. The advertising market is extensive enough that if Google or any other ad-tech company abused their market power to obtain monopoly rent, advertisers and publishers would move to another platform, such as Amazon, Meta, or even turn to other means of advertising. Despite claims made in a summary of the bill disseminated by its lead sponsor, Sen. Mike Lee (R-Utah), advertisers and publishers are not locked into a specific platform with no other options, such that they have to pay monopoly rent—no single ad-tech platform accounts for the majority of digital advertising revenue. (See the inset figure from eMarketer.) In 2021, Google, the largest digital advertising platform, only accounted for 27.7 percent of digital advertising revenue, and Facebook came in a close second at 24.2 percent. Furthermore, these companies also face competition from Amazon, which now accounts for 13.3 percent of digital advertising revenue and whose share is only projected to grow. The presence of alternatives for both publishers and advertisers means that the digital advertising market is competitive, and the ability of any one digital advertising platform to exercise market power is limited.

As a result, the CTDA would undoubtedly hinder the overall economy’s growth by imposing higher transaction costs for all stakeholders involved—namely, advertisers, publishers, and consumers. Moreover, the higher transaction costs brought about by the bill also harm innovation as its provisions target the innovative technologies introduced by ad-tech platforms. Consider how Google, one of the large ad-tech platforms that the CTDA targets, has only benefited the economy and consumers by revolutionizing the digital ad market with its technologies. In 2007, Google acquired DoubleClick and subsequently changed the ad-tech market by becoming a company that offers both text-based and display ads. In turn, Google increased efficiency in the ad-tech market by reducing the time it takes to place both text-based and display ads. The amount spent on digital advertising has grown from $21.2 billion in 2007 when Google expanded into display ads to $183.1 billion in 2021.

Keeping transaction costs high for the ad-tech market would be a boon for less disruptive ad markets such as TV advertising or print advertising. That’s why traditional players have instigated a regulatory backlash against ad-tech platforms. It is already at play in Australia and in Europe, where legislation has been introduced to protect incumbents against the disruptive innovations of ad-tech platforms that benefit consumers.

Should CTDA solve the alleged conflicts of interest of ad-tech platforms by breaking up two inseparable sides of the ad-tech market? If the answer is yes, then consumers browsing the Internet may have less relevant ads that cost more for companies to place, so advertisers may find alternative means of advertising more attractive. If the answer is no, as it should be, then the inseparability of the two sides of the ad-tech market will best serve consumers. The bill should focus on more favorable provisions, such as transparency and privacy, that enhance the ad-tech market instead of undermining its foundations. That is the only way forward if innovation and consumer welfare matter.

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