Ad Blockers and Ad Quality

Problem Definition: There has been a fierce debate among practitioners regarding ad blockers. On one hand, ad blockers are considered a serious threat to content platforms because advertising is a key revenue driver. On the other hand, people argue that ad blockers improve the advertising industry by pushing the creation of more attractive ads. This paper investigates the impact of ad blockers on a content platform when the advertiser's ad-quality decision is taken into account. Methodology/Results: We develop an analytical model with an advertiser, a content platform, and a mass of consumers. Consumer valuations of advertising involve three aspects: information value, entertainment value, and nuisance disvalue. The advertiser can invest in ad quality to enhance its ad's entertainment value. Consumers are classified into effective and ineffective types based on whether they derive information value and potentially purchase the advertised product. We identify two effects of ad blockers: The consumer screening effect filters out ineffective consumers who cannot generate revenue for the advertiser. The quality adjustment effect may induce the advertiser to improve ad quality to better serve effective consumers. As a result of these two effects, the presence of ad blockers can lead to a win-win-win outcome for all parties. This occurs when nuisance disvalue is high and information value is intermediate, or when the fraction of effective consumers is low and nuisance disvalue is low. We further examine five extensions that reflect various industry structures and market micro-dynamics to demonstrate generalizability of the all-win outcome. Managerial Implications: Advertisers and content platforms should manage ad blockers strategically, which possibly makes the system more efficient and benefits every stakeholder. Always opposing ad blockers is not the best solution and permission should be given under certain circumstances. The key determinants of such permission are consumers' distribution and their value formulas of ads.