Regulating Online Political Advertising

In the United States, regulations have been established in the past to oversee political advertising in TV and radio. The laws governing these marketplaces were enacted with the fundamental premise that important political information is provided to voters through advertising, and politicians should be able to easily inform the public. Today, online advertising constitutes a large fraction of all political ad spending, but lawmakers have not been able to keep up with this rapid change. In the online advertising marketplace, ads are typically allocated to the highest bidder through an auction. Auction mechanisms provide benefits to platforms in terms of revenue maximization and automation, but they operate very differently to offline advertising, and existing approaches to regulation cannot be easily implemented in auction-based environments. We first provide a theoretical model and deliver key insights that can be used to regulate online ad auctions for political ads, and analyze the implications of the proposed interventions empirically. We characterize the optimal auction mechanisms where the regulator takes into account both the ad revenues collected and societal objectives (such as the share of ads allocated to politicians, or the prices paid by them). We use bid data generated from Twitter’s political advertising database to analyze the implications of implementing these changes. The results suggest that achieving favorable societal outcomes at a small revenue cost is possible through easily implementable, simple regulatory interventions.