Quality Score: The Cost of a Virtuous Cycle

Search engines and many social advertising platforms use the so-called quality score to
favor certain advertisers in their advertising auction. While the standard justification for
quality scores is the need to provide discounts to advertisers with higher click-through rates,
this work examines the role of quality score in enticing heterogeneous advertisers to invest
in quality and its impact on ad platforms’ revenue. The results suggest that a quality
score function that rewards bidders in excess of their click-through rates does increase the
quality investments but in a non-monotonic way. Higher rewards of landing page quality
do not necessarily mean higher investments. Furthermore, such an improvement in quality
levels often comes with a sacrifice of the auction revenue despite the higher bids. While the
potential revenue impact for the auctioneer depends on the bidding strategies and auction
formats, there exists a quality score function that ensures increased revenues by rewarding
quality improvement. Several managerial implications for both advertisers and publishers
are discussed.