Advertisement or… negotiation?
Last Sunday I had the pleasure of meeting Anna Bernasek and Dan Mongan, who came to the Alt Banking group meeting to tell us about their book All You Can Pay: How Companies Use Our Data To Empty Our Wallets.
While they were discussing their book, the topic of online advertisement naturally came up. Dan and Anna made an interesting point in that discussion which I’ve been chewing on ever since. Namely, they provocatively suggested that we should never use the word “advertising” to describe the complicated and sophisticated process of tailored and targeted offers to an individual internet browser. Instead, we should call it a “negotiation.” Let me explain their reasoning.
They started by introducing the concept of a “consumer surplus.” This is the difference between what a given consumer would be willing to pay for a product versus what the price actually is for that product. If the difference is positive, the consumer buys the product and has a theoretical bit of “extra” money in their wallet, which corresponds to the happy fact that the price was lower than their maximum price. If the difference is negative, the consumer doesn’t buy the product because it’s too expensive for them.
Does that make sense? For me it only kind of makes sense. I mean, it makes quite a bit of sense for certain situations, like when I’m buying something I don’t actually need, out of funds I consider limited but discretionary. So, for example, after my soggy experience a couple of weeks ago I threw away my faulty tent, so I’m looking at buying a new tent, but then again I’m not going camping any time soon, so the price has to be right.
Here’s an important example where it doesn’t make as much sense. If I’m poor and I need a car to go to work, and I know I have to borrow money to buy the car, then the amount of the loan is less important than the fact that I can get a loan in the first place. The “consumer surplus” is less obvious when it’s a matter of debt rather than cash, and when it’s a desperately needed purchase rather than discretionary.
Anyhoo, let’s imagine consumer surplus to be a thing that people consider useful. The point Is, big data companies are getting better and better and determining or at least approximating what a given consumer’s surplus is, and making offers accordingly.
So, if you’re on a platform where there are advertisements, the algorithms behind those offers might infer that you have a certain amount of money to spend on a car or hotel, and might offer you certain models of cars with or without leather seats, or hotels in certain neighborhoods priced in a certain range, to squeeze out your consumer surplus. Yes, there might be cheaper versions of these things that you’d be happy with, and that would save you money, but the algorithm has determined your spending power, which is all they care about.
Thus, instead of an advertisement, which sounds like something we imagine many many people see, this is a personalized negotiation, just to you personally, and crucially, you don’t see what other people are being offered. So it’s a one-sided negotiation with enormous information asymmetries.
Note this is the opposite of what we’d expect in the “free market,” where all the offers are on the table and you get to choose the one with the lowest price. Partly we ignore that vision because many of the platforms we now spend time on are more or less monopolistic in nature, and partly it’s because of the nature of the auction system of advertising: the “ad” for a more expensive hotel room, that’s still in your price range, will win an auction because it is worth more to the seller.
I think it’s a pretty good distinction, although I’m not sure “online sale negotiations” is a catchy enough phrase to replace “online ads” any time soon.