Lemon Ads: Adverse Selection in Multi-Channel Display Advertising Markets

Two auction-based channels play a crucial role in facilitating transactions of ad impressions in display advertising: real-time bidding (RTB), which is accessible to all advertisers, and private marketplace (PMP), which is restricted to a select group of advertisers through an invitation-based agreement with publishers. Despite the ongoing discourse on the benefits and drawbacks of these two channels, how their coexistence influences the market dynamics and outcomes remains an open question. In this paper, we seek to address this question by focusing on the welfare implications of publishers' channel adoption. First, using a game-theoretic model, we show that publishers who use both RTB and PMP can leverage their private information on impression quality to sell lower-quality impressions at higher prices in RTB, thus exposing their RTB-only counterparts to adverse selection. To validate our theoretical prediction, we conduct an empirical analysis using a large proprietary dataset. The results provide strong evidence of the presence of adverse selection. In particular, we find that, all else being equal, RTB impressions from dual-channel publishers are of significantly lower quality compared to those from single-channel publishers. Our findings shed light on the nuanced dynamics between RTB and PMP and contribute to the understanding of the complex interplay of informational and strategic factors in the display advertising market.