Should Ad Networks Bother Fighting Click Fraud? (Posted by Bobji Mungamuru)

It's an understatement to say that online advertising has become big business. Much of the growth has been due to the emergence of advertising networks, such as Google, Yahoo! and Advertising.com.

Over the last few years, however, click fraud has emerged as a significant threat to the business model of the online advertising industry. (I recommend this book chapter if you want to learn more about click fraud.)

You can think of it as an analogue to a "currency crisis" – advertisers (investors) avoid buying ads (currency) because they are worried about the devaluation of ads due to rampant fraud, and it is this lack of advertiser (investor) confidence itself that causes the value of ads to fall.

The central issue is this: Suppose an advertising network (or "ad network", for short) decides that a given click-through is "fraudulent". The implication is that the ad network will not bill the advertiser for that invalid click. On the other hand, if the click is marked valid, the ad network could charge full price for it. Therefore, arguably, the ad network is “leaving money on the table” by marking clicks fraudulent. As such, why would ad networks even bother fighting fraud?

Google CEO Eric Schmidt famously claimed in July 2006 that there in fact was a "perfect economic solution" to click fraud, which is to just "let it happen". He conjectured that the auctions used to sell ads are "self-correcting", since market prices would naturally adjust for fraud. Is Dr. Schmidt right? Is it economically reasonable for ad networks to just let fraud happen?

In my paper, "Should Ad Networks Bother Fighting Click Fraud? (Yes, They Should.)", I analyze a simple economic model of the online advertising market, and conclude that Dr. Schmidt is, in fact, quite wrong. In fact, from an ad network’s perspective, to "let it happen" is absolutely the worst economic solution! Ad networks who develop effective algorithms for detecting fraud, and aggressively apply these algorithms, gain a significant competitive advantage in the online marketplace.

In other words, Google's official response to the "let it happen" fiasco, while well-intentioned, missed the whole point: it's not out of the "goodness of their heart" that Google should fight fraud, rather it is out of sheer economic self-interest.

I presented a shorter version of this paper at the Financial Cryptography and Data Security conference this January. The title of the paper was "Competition and Fraud in Online Advertising Markets".

This entry was posted by Bobji Mungamuru, on Wednesday, July 2, 2008. You can leave your response.