Ad-Blockers: A Blessing or a Curse?

Manmohan Aseri (), Milind Dawande (), Ganesh Janakiraman () and Vijay S. Mookerjee ()
Additional contact information
Manmohan Aseri: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213;
Milind Dawande: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080
Ganesh Janakiraman: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213;
Vijay S. Mookerjee: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080

Information Systems Research, 2020, vol. 31, issue 2, 627-646

Abstract: Users who have an ad-blocker installed present a genuine predicament for a website (also known as the publisher): On the one hand, these users do not generate revenue for the website; on the other hand, denying them access can shrink the user base and adversely affect the popularity of the website, ultimately reducing traffic over the long run. This has led some websites to require that ad-block users “white-list” them for obtaining access to an “ad-light” experience. We model the decision problem for a website facing two user segments: regular users and ad-block users . The first-level decision or gating strategy is whether to allow ad-free access to ad-block users or require them to white-list the website for gaining access. When ad-block users are allowed ad-free access, the second-level decision is the level of advertising (or ad-intensity ) for regular users. When ad-block users are required to white-list, the second-level decisions are the ad-intensities for regular users and ad-block users. The net utility of a user from visiting the website depends on the intrinsic value of the website’s content, the value obtained due to network effects driven by the amount of traffic/popularity of the website, and the cost incurred due to the presence of ads. We derive an optimal gating and ad-intensity strategy for the website and also solve an identical model for a world without ad-block software. We show that the website can increase its revenue by discriminating between regular and ad-block users via the ad-intensities shown to them. More interestingly, we find that the discriminatory power bestowed on the website by ad-blockers can increase the social surplus and, in particular, increase the surplus of both user segments, namely, regular users and ad-block users, when the utility from their outside option is below a threshold. Thus, the advent of ad-blockers can lead to a win-win for both the website and its users. Finally, we propose a superior selective-gating strategy in which only a fraction of ad-block users are gated. We establish the robustness of our conclusions under several enhancements to our base setting: (a) heterogeneous profitabilities from regular users and ad-block users, (b) endogenous adoption of ad-blockers, (c) the presence of a subscription option, and (d) negative externality due to increased traffic. Our analysis ends with recommendations for three stakeholders in this problem, namely, publishers, web-browser developers, and policy makers.

Keywords: ad-blocking; web advertising; rational expectations equilibrium; revenue maximization (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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