Adsense and Information Asymmetry
(as an aside, I have no opinion on the prevalence of clickfraud. I’m interested in talking about market mechanisms)
George Akerlof won the Nobel Prize in Economics in 2001, and is the author of a well-known paper called “The Market for Lemons: Quality Uncertainty and the Market Mechanism”. It describes the possibility of a market of willing buyers and sellers shutting down entirely when sellers have more information about the product being sold than buyers.
A simple example involves the market for used cars. We imagine a market where half the cars are in good condition and the other half are “lemons” (don’t work properly and are essentially worthless). The current owner of a given car knows whether they have a good car or a lemon, but potential buyers only know that half the cars are lemons and don’t know the condition of any particular car.
In this situation, a buyer may be willing to purchase a good car for $3000, but will only offer $1500, given that there is a 50/50 chance that he’s buying a lemon. An owner, knowing he has a good car may not take less than $2500, but another owner who has a lemon will be willing to sell it for $1500, since it’s worthless anyway. This will lead to a situation where mostly lemons are traded - an unsustainable situation, since eventually buyers will learn that almost all cars traded are lemons and will lower their bids, which in turn will make owners of good cars even less likely to part with them. This process continues until the market shuts down entirely.
So to what extent does this apply to cost-per-click advertising? The analogs are fairly obvious: advertisers are buyers, regular publishers are selling “good cars”, and splogs/clickbots/click-arb sites/etc. are peddlers of “lemons”. One could certainly imagine that advertisers, knowing that many of their clicks come from bots or uninterested parties who were tricked into clicking on ads, would lower their bids. At some lower price, legitimate publishers might decide that it’s not worth having ads on their site and that the space could be better used for something else. As above, eventually this could lead to a situation where money is only being made by the scammers, as it’s just not worth it to anyone else.
Fortunately, we’ve developed many processes to reduce the amount of information asymmetry enough that a market for used cars can exist. We can test drive the car, take it to a trusted mechanic, or look for a certification and warranty from the manufacturer. It seems to me that this is the correct approach and that the lemons problem defies the idea that price changes can always compensate for problematic markets.
Ad networks do have an approval process, but it is apparently not particularly effective. This is understandable, given that there are far too many sites showing ads for a single middleman to verify them all. I don’t really know what the solution is, but it’s possible that some sort of community process might work. Presumably we would all (except scammers) benefit from the elimination of these scams - it would keep ad rates higher, which would provide motivation for legitimate publishers and developers, and it would destroy one incentive to clutter the internet with useless links.