Regulating Native Advertising

Yue Wu, Esther Gal-Or, and Tansev Geylani (2019)

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Native advertising is not fully transparent to consumers because it bears similarity to editorial content. Increasing the opaqueness of native ads can raise publishers' revenue in the short term, but can also negatively affect consumers' perception of the publishers' credibility and lead to lower profitability in the long run. In this paper, we develop a game theoretical model of native ads to investigate the economic implications of regulation. We show that publishers have incentives to self-regulate native ads through lower opaqueness in order to signal their quality to the market. We obtain several surprising results. First, stricter regulation can make native ads more opaque, on average, because it can eliminate the incentives of high-quality publishers to distinguish themselves from low-quality publishers. Second, as the proportion of high-quality publishers in the population increases, average opaqueness can sometimes increase. Finally, when it is feasible for publishers to violate regulatory measures while being subjected to penalties for infringements, average opaqueness may decline in comparison to an environment where violations never arise.

Manuscript available upon request