Regulating Native Advertising

Abstract

Native advertising is not fully transparent to consumers because it bears similarity to editorial content. Increasing the opaqueness of native ads can raise publishers’ click-through rate, but can also negatively affect consumers’ quality perception of the publishers’ editorial content and lead to lower profitability. In this paper, we develop a game-theoretical model of native ads to investigate the economic implications of regulation. Our model considers two types of publishers, who differ in the quality of their editorial content. We show that publishers have incentives to self-regulate native ads through lower opaqueness in order to signal their high quality to the market. We find that stricter regulation can make native ads more opaque, on average, because it can eliminate the incentives of high-quality publishers to distinguish themselves from low-quality publishers. Consequently, strengthening regulation can yield lower consumer surplus and social welfare. This paper was accepted by Duncan Simester, marketing. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2021.4242 .