The Prisoner’s Dilemma in online advertising August 1, 2007Posted by jeremyliew in ad networks, advertising, Consumer internet, economics, video, web 2.0, widgets.
I posted previously about how increased innovation in online advertising is driving up costs. Online media companies would generally prefer more standarization and less customization in online advertising; this makes their processes more scalable and keeps their costs down. However, they face a prisoner’s dilemma situation that has made it hard to drive standardization as an industry.
The prisoner’s dilemma is a staple of game theory classes. Wikipedia summarizes the problem as follows:
Two suspects, A and B, are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both stay silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must make the choice of whether to betray the other or to remain silent. However, neither prisoner knows for sure what choice the other prisoner will make. So this dilemma poses the question: How should the prisoners act?
Classic game theory predicts that in a single instance of the game, the dominant strategy is to betray your accomplice. However, if the game is repeated, the best strategy for rational players repeatedly interacting for indefinitely long games can lead to sustaining the cooperative outcome.
The Wikipedia article cites several real world examples of the prisoner’s dilemma, including one involving cigarette advertising.
When cigarette advertising [on TV and radio] was legal in the United States, competing cigarette manufacturers had to decide how much money to spend on advertising … cigarette manufacturers endorsed the creation of laws banning cigarette advertising [on TV and radio], understanding that this would reduce costs and increase profits across the industry.
While not advocating that we use cigarette companies as a role model, I believe that the online advertising industry currently faces a similar opportunity to reduce costs and increase profits over the issue of increasing customization in online advertising that I posted about last week.
So how does this relate to the prisoners dilemma? Rather than the police asking suspects to confess, advertisers are asking online media companies for costly custom advertising. If one media company is willing to customize and its competitor isn’t, then the customizing company is more likely to win the deal.
But if both companies customize then creative and production costs go up while the size of the ad spend does not. More money is spent on creating the campaign, and less goes to buying media. Thus both media companies suffer.
If neither company customizes, then less money is spent on creative and more goes to buying media and filling the online media companies’ coffers.
To make this situation more complicated, there aren’t just two prisoners who need to cooperate, but rather many online media companies. With many players, it can be very hard to drive towards a cooperative outcome.
For media companies, the “cooperation” case means adhering to a set of standards in creative format. While this doesn’t eliminate the costs of creative, it does at least set boundaries to help control creative costs.
While these standards exist in banner advertising, (728×90, 300x 250, 160×600 etc), they do not yet exist in other, newer forms of online advertising (including social media marketing, widget marketing, online video marketing, and casual immersive world marketing). But through the IAB, we saw standards eventually emerge in banner advertising, and hopefully we will see the IAB and other standards bodies (perhaps the newly formed Widget Marketing Association?) help set standards within the newer forms of online advertising as well.
This is a necessary but not sufficient condition for the industry to converge to a stable “cooperative” equilibrium in this version of the prisoner’s dilemma. I’ve campaigned for standards in social network advertising before.