Ad Blockers and Ad Quality

Problem Definition: There is a fierce debate among practitioners regarding ad blockers. On one hand, ad blockers are considered a serious threat to content platforms because advertising is a key revenue driver. On the other hand, people also argue that ad blockers improve the advertising industry by pushing the creation of more attractive ads. This paper investigates the impact of ad blockers on a content platform when the advertiser's ad-quality decision is taken into account. Methodology/Results: We develop an analytical model with a content platform, an advertiser, and a mass of consumers. We consider two settings: the ad fee is either exogenously given or endogenously set by the platform. The advertiser determines ad quality, which may affect the utility consumers obtain from consuming content. Consumers are heterogenous in whether they value ads and how much nuisance they perceive from ads. In the exogenous-ad-fee setting, we identify two effects of ad blockers: The consumer-screening effect screens out non-valuable consumers who cannot generate revenue for the advertiser as well as a portion of valuable consumers who perceive a strong nuisance from ads. The quality-enhancement effect induces the advertiser to improve ad quality to retain more valuable consumers. As a result of the two effects, the presence of ad blockers can result in a ``win-win-win" outcome for all parties when the proportion of valuable consumers is low, or when the proportion of valuable consumers is high and consumers' nuisance costs in general fall within a moderate range. In the endogenous-ad-fee setting, the effects and win-win-win outcome carry over, but we also find some dynamics that deviate from the exogenous ad-fee setting; e.g., ad blockers may reduce ad quality and diminish consumer welfare. Managerial Implications: Advertisers and content platforms should manage ad blockers strategically, which may make the system more efficient and benefit every party. Always opposing ad blockers is not the best solution, and permission should be given under certain conditions. How firms deal with ad blockers should depend on the consumer distribution with respect to the gain and loss consumers get from ads