- ad blocking; ad sensitivity; ad intensity; competitive strategy; advertising; game theory
While online advertising is the lifeline of many internet content platforms, the usage of ad blockers has surged in recent years presenting a challenge to platforms dependent on ad revenue. Using a simple analytical model with two competing platforms, we show that the presence of ad blockers can actually benefit platforms. In particular, there are conditions under which the optimal equilibrium strategy for the platforms is to allow the use of ad blockers (rather than using an adblock wall, or charging a fee for viewing ad-free content). The key insight is that allowing ad blockers serves to differentiate platform users based on their disutility to viewing ads. This allows platforms to increase their ad intensity on those that do not use the ad blockers and achieve higher returns than in a world without ad blockers. We show robustness of these results when we allow a larger combination of platform strategies, as well as by explaining how ad whitelisting schemes offered by modern ad blockers can add value. Our study provides general guidelines for what strategy a platform should follow based on the heterogeneity in the ad sensitivity of their user base.