Regulating Native Advertising

Yue Wu, Esther Gal-Or, and Tansev Geylani (2018)

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As a popular format of advertisement, native ads can raise publishers' revenue by increasing the number of clicks but can deteriorate the quality of their editorial content. While regulations are implemented to reduce deception, the advertising industry is concerned about the necessity of those regulations. In this paper, we develop a game theoretical model of native ads and investigate the economic implication of regulations. Our model considers both publishers who have high ethical standards and are more concerned about the opacity of their native ads, and those who have low ethical standards and are less concerned about the opacity. We show that publishers have incentives to self-regulate native ads and signal their ethical standards to the market. Surprisingly, a stricter regulation can make native ads more opaque on average because it can eliminate high-standard publishers' self-regulation incentives. Furthermore, when the market provides a higher premium for ethical publishers or when publishers are more likely to have high ethical standards, native ads can become more opaque on average. In addition, if native ad regulation can be violated and a penalty is imposed on infringements, the average opacity can be higher with a higher penalty.