The Grifter Equilibrium: How CPA Advertising Broke Quality Signaling
This paper explores how the internet, and specifically Cost-Per-Acquisition (CPA) advertising, has broken the traditional quality signaling mechanism in advertising. Historically, high-quality sellers were more willing to invest heavily in advertising due to higher long-term returns. CPA advertising, however, allows low-quality sellers to fund ads from day-one revenue, undermining this signal. Factors like easy brand creation, light penalties for returns, rating compression, and consumer reliance on price heuristics contribute to a "grifter equilibrium" where low-quality products dominate. The paper presents an economic model illustrating this and proposes solutions such as persistent manufacturer IDs and return-adjusted CPA surcharges to deter low-quality sellers.