Online Advertising: Heterogeneity and Conflation in Market Design

The past decade has seen the explosive emer gence of online advertising as a major source of revenue for Internet publishers. Analyses of this phenomenon are mostly conducted in the sway of Google's hugely successful search advertising program. In the early days of the Internet, before Google, virtually all advertising revenues were related to simple display ads. Yet by 2008 search advertising accounted for over $10.5 billion of the $23.4 billion in total online advertising, and pun dits were forecasting continued growth at rates of 12 percent per year over the next five years.1 Internet advertising markets have broken sharply from the advertising markets for tradi tional media. In the older media, every consumer that received a particular magazine, listened to a particular radio program, or watched a particu lar TV show would read, hear or see the same advertisement. An advertiser that wanted to reach an audience with particular characteris tics could do so only within narrow limits. For example, a beer company might advertise on televised football games, and a maker of fashion clothing might advertise in women's magazines. Although publications do some tailoring of their offerings, as when a newspaper has differ ent local editions, audience mix is nevertheless constrained by the audiences for each type of publication, rather than by the objectives of the advertiser or the current intentions of the viewer. The Internet changes that. When a con sumer types "running shoes" into a search box at Google or Yahoo or Bing, it provides direct information about the searcher's intent?what