Middleman or middle man7/27/2023 The model helps explain these shifts as follows: Picture a nation with two large cities - Chicago and New York, for example - each with a hometown paper and a local readership. They were paid a 15% commission based on how much ad space they sold - a standard arrangement used to motivate salespeople in most industries.įor the next century, between the 1880s and the 1980s, advertising agencies worked on behalf of firms that needed to advertise, buying media space on their behalf - yet they still got paid 15% commission based on how much they bought. In the earliest period, between the 1840s and the 1880s, advertising agents worked for newspaper publishers, seeking out local businesses to buy ad space in the paper. To explain why the agencies first switched sides and then demanded they be able to keep their old compensation structure, the authors create a model with a simplified set of principal-agent relationships that evolve over time as the industry changes. Given this conflict of interest inherent in the billings-based compensation of ad agencies, the authors suggest that ad agencies were able to maintain their commission structure not only by essentially colluding with publishers to ensure that they could continue to siphon off 15% of an advertiser’s media spend but also while simultaneously erecting barriers to entry into the agency industry. Why should a buyer’s agent receive a commission on the money spent by the client? Such a compensation structure seems to work against the interests of clients, who are presumably interested in getting a good deal (e.g., an effective advertising campaign) and not just in spending more money. The Evolution of Commission and Compensation Structures But why did they switch sides if they apparently liked the old compensation structure better? Why didn’t they just keep working for the publishers? And how did their collusive arrangement eventually disintegrate?Ī working paper by Hebrew University’s Sharon Horsky and UCLA Anderson’s Robert Zeithammer models how the ad agency industry evolved over time, explains why the switch coincided with the rise of national brands and documents that the collusive arrangement disintegrated not after antitrust rulings, nor after the rise of new media types, but only when new types of specialized agencies emerged in the 1990s. How did they pull that off? It is well known from repeated antitrust lawsuits that the ad agencies colluded with publishers to keep their billing-based compensation after switching sides to work for advertisers. And for over a century, advertising agencies collected a 15% commission on media billings, even after they switched from selling ad space for publishers to buying ad space on behalf of advertisers. Literary agents grab a hefty 15% of a book deal’s payout. If you sell your home, most likely you’ll hand over 5% of the sale price to real estate agents. Ad agencies’ 15% fee lasted 100 years longer than it might haveĬertain industries seem to have perfected the art of extracting their pound of flesh.
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