Trustless Advertising Auctions with Asymmetric Information

Description

Due to an increasing number of recent reports of ad fraud in the online advertising industry and several lawsuits against ad exchanges regarding deceptive claims made to advertisers, trust between exchanges and advertisers is undergoing a significant erosion. In contrast to traditional ad auction settings commonly examined in academic literature, where advertisers can rely on the accuracy of information provided by ad exchanges, in practice the situation is not that ideal. In this project we study advertising auctions in environments characterized by a lack of trust, and information asymmetry. We present a theoretical model in which both the ad exchange and the advertisers hold unique knowledge about advertisers’ valuations, but there is mutual distrust regarding the accuracy of information provided by the other party. Our findings reveal that the absence of trust has a substantial impact on auction strategies and outcomes, compared to more conventional auction settings. We demonstrate that in trustless environments, an ad exchange may derive benefits from possessing limited information about advertisers’ valuations. Counterintuitively, acquiring more information can be damaging to the exchange as it may arouse suspicion among advertisers, negatively impacting both parties. Our results also reveal that an exchange in equilibrium will selectively invite advertisers to participate in the auction, rather than allowing all. This strategy allows the exchange to send credible signals to the advertisers, which they can then utilize in their bidding, despite the prevailing trustless environment. Our research also suggests that a trustless environment can prove beneficial for advertisers when compared to a trusted environment, especially when the exchange has more information. Interestingly, there exist situations where it may be beneficial for advertisers to disregard the exchange’s information, even if they can trust it. However, in equilibrium, they do not do so, leading to a ‘paradox of trust’.