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Author: matklad

content/posts/2025-08-30-ads-are-a-positional-good.dj

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+# Ads Are a Positional Good
+
+Non-technical armchair economics post, where I explain my pet theory for why everything on and outside
+of the internet is absolutely infested with ads.
+
+The traditional explanation is that any paid service will lose out to a "free" service funded by
+advertising. I think there's some truth to it! Another explanation is transaction overhead. You
+basically can't pay 1 cent for something, as just the annoyance of using the debit card is greater
+than the value. Contrast with the ease of dismissing a cookie consent banner! I think this is also
+is important, but, at best, a part of the story.
+
+The simple fact is that even paying for things doesn't rid you of those pesky attention vampires!
+When I go to the cinema, I buy the ticket, but still have to sit through ten minutes of
+advertisement. Similarly, I pay for subscription to economist.com, and I still see a lot of ads if
+I disable my ad-blocker.
+
+I think there's a more fundamental force in play here, which is, you guessed it: ads are a
+positional good. Let me unpack!
+
+[Positional Good]{.dfn} is a term from economics. To explain it, let's start with a normal good,
+like bread. You want bread because you derive value from it, you avoid starvation. So you are
+willing to buy it, and the price you are willing to pay is proportional to the value you personally
+derive from it. In general, you want to pay only so much for bread, because your hunger is finite.
+
+In contrast, the value of a positional good is indirect. It is how much _less_ of the good the
+others have. What matters is not the absolute amount of good you have, but your relative position
+among other actors. A standard (though somewhat muddled) example is a University degree. There's
+certain intrinsic value in having a degree from a more prestigious University, even if we keep the
+actual level of knowledge attained fixed. "Better" degree positions you higher relative to other job
+applicants. So prospective students compete for a limited number of seats not so much with the
+underlying hard granite of science, but rather with each other, and only the brightest go to the best
+University (which creates a feedback loop, but this is the _other_ mechanism, not covered by the
+article).
+
+I think it is the same for ads! If you are in a supermarket and want to buy a soft drink, you
+decision (simplifying, of course!) is based on how much craving you have and how much do you value
+your craving in euros. If you are particularly thirsty, you might even buy a larger bottle, but
+unlikely more than one.
+
+Now imagine that you are a soft drink company, and you are considering an ad slot before a movie.
+How much should you pay? Well, it's easy --- just a little bit more than your rival company! Your
+ads aren't going to meaningfully affect the amount of thirst people have, but they certainly can
+nudge the decision of _which_ soft drink to buy. And, given that the other company is locked into
+the same logic, you are going to spend basically as much as you can afford.
+
+And that is my mental model. While advertising creates some value directly, by informing customers
+of their options, I _think_ that the bulk of ads is pure competitive value destruction, which
+redirects surplus value created by productive economic activity to companies hosting advertisement
+battlegrounds, with human attention being merely a collateral damage.