Agency Market Power and Information Disclosure in Online Advertising

Studies have shown that agencies in online advertising can exercise their market power over publishers to extract surplus. This may happen in the form of bid coordination where the agencies hold out some ad candidates from publishers’ auctions to soften competition, ultimately reducing the publishers’ ad revenue. This paper examines the publishers’ information disclosure strategies to neutralize agency market power. We show that the publisher’s withholding targeting information from agencies is an effective strategic lever to blunt the efficacy of bid coordination, and hence prevent some advertisers from using agencies. Withholding information, however, may also hurt publishers by lowering allocation efficiency. Thus, the publishers’ central tradeoff is that disclosing information increases total value created but risks conceding a large share of the value to the agency. We find that for low value of information, publishers “compete” against agencies by withholding information to induce advertisers not to use the agency. If the value of information is high, withholding information becomes too costly for publishers, and they “cooperate” with agencies by disclosing information.