Signaling Through Advertising when an Ad Can Be Blocked.

The advance of ad-blocking technology is expected to have profound implications on the advertising industry. This paper makes the first attempt to understand the impacts of ad blocking on consumer's ad avoidance and optimal reactions by advertiser and ad platform while advertising signals quality. We extend the standard models on ad signaling to the context of ad blocking. Our model incorporates both ad-production cost and ad-distribution cost, and allows ad quality (ad production) to impact consumers' nuisance costs. We find that, counterintuitively, a lower ad-blocking cost may result in fewer consumers blocking ads and higher profit for the advertiser. This is driven by the signaling function of advertising. In particular, the ad platform reacts to lower ad-blocking cost by lowering the unit ad-distribution cost it charges, forcing the advertiser to spend more on ad production because ad-distribution cost alone is insufficient to signal product quality. The high ad-production cost may offset consumers' disutility of ad viewing and result in fewer consumers blocking ads when ad blocking becomes less costly. We also confirm the robustness of this insight with various model extensions and discuss the implications of our findings.