The multibillion-dollar online advertising industry continues to debate whether to use the cost per click (CPC) or cost per action (CPA) pricing model as an industry standard. This paper applies the ...economic framework of incentive contracts to study how these pricing models can lead to risk sharing between the publisher and the advertiser and incentivize them to make efforts that improve the performance of online ads. We find that, compared with the CPC model, the CPA model can better incentivize the publisher to make efforts that can improve the purchase rate. However, the CPA model can cause an adverse selection problem: the winning advertiser tends to have a lower profit margin under the CPA model than under the CPC model. We identify the conditions under which the CPA model leads to higher publisher (or advertiser) payoffs than the CPC model. Whether publishers (or advertisers) prefer the CPA model over the CPC model depends on the advertisers’ risk aversion, uncertainty in the product market, and the presence of advertisers with low immediate sales ratios. Our findings indicate a conflict of interest between publishers and advertisers in their preferences for these two pricing models. We further consider which pricing model offers greater social welfare.
This paper was accepted by J. Miguel Villas-Boas, marketing
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The impact of multi-channel technology-enabled digital goods on the sales of the physical counterpart faces uncertainty in the electronic commerce domain. We address the issue empirically by ...identifying the effect of the availability of digitally-delivered movies on physical DVD movie sales. Unique to our study is our interest in not only purchased digital goods but rented digital goods as well. We construct a robust panel dataset consisting of movie data collected from Amazon and Barnes and Noble on the same day for every movie observed. A key feature of our dataset is the multi-channel availability of digital purchase and digital rental movie formats at Amazon. Our results show that the availability of the digital purchase format does not have a significant effect on DVD sales. Surprisingly, the availability of the digital rental format is associated with a significant reduction in DVD sales. The results imply that a product substitution effect may be occurring between the digital rental and the physical DVD purchase of the same movie. We conduct robustness tests to show under which conditions the effect is greatest. Our results also provide practical implications to inform strategies regarding movie format release windows.
•Digital rentals significantly cannibalize sales of physical movies.•Digital purchases do not significantly cannibalize sales of physical movies.•Cannibalization is driven by new movies that have few reviews and large discounts.•Cannibalization diminishes after a physical movie has been released for 2000 days.
Today's online advertising contracts tie online advertising payments directly to campaign measurement data such as click-throughs and purchases. This paper applies the economic theory of incentive ...contracts to the study of these pricing models and provides potential explanations as to when and how CPC (cost-per-click-through) and CPA (cost-per-action) pricing models should be used. We argue that using CPC and CPA models appropriately can give both the publisher and the advertiser proper incentives to make non-contractible efforts that may improve the effectiveness of advertising campaigns. It also allows the publisher and the advertiser to share the risk caused by uncertainty in the product market. Our research discovers various factors that can influence the usage of CPC and CPA models.
Trust is particularly important in online markets to facilitate the transfer of sensitive consumer information to online retailers. In electronic markets, various proposals have been made to ...facilitate these information transfers. We develop analytic models of hidden information to analyze the effectiveness of these regimes to build trust and their efficiency in terms of social welfare. We find that firms' ability to influence consumer beliefs about trust depends on whether firms can send unambiguous signals to consumers regarding their intention of protecting privacy. Ambiguous signals can lead to a breakdown of consumer trust, while the clarity and credibility of the signal under industry self-regulation can lead to enhanced trust and improved social welfare. Our results also indicate that although overarching government regulations can enhance consumer trust, regulation may not be socially optimal in all environments because of lower profit margins for firms and higher prices for consumers.
Internet price search tools, notably shopbots, have reduced consumers' search costs for price and product characteristics. While a variety of analytic models predict that increased consumer search ...will lower price levels among competing retailers, there is no consensus in the literature as to how price dispersion will change with increased consumer search. Moreover, there are no papers that have empirically tested these predictions using direct observation of variation in shopbot use over time.
This paper examines the impact of changes in shopbot use over time on pricing behavior in the Internet book market. We do this by combining price and clickstream data collected from August 1999 to July 2001 — a period of rapid expansion in shopbot use. We find that a 1% increase in shopbot use is correlated with a $0.41 decrease in price levels and a 1.1% decrease in price dispersion.
This dissertation addresses the analysis and design of efficient electronic marketplaces in three essays. The first essay analyzes how to design efficient peer-to-peer information exchange in the ...presence of externalities. The second essay analyzes how to design efficient privacy protection mechanisms in the presence of consumers' privacy concern. The third essay analyzes the impact of changes in shopbot use over time on pricing behavior in the Internet book market. Essay 1. The virtual commons: Why free-riding can be tolerated in file sharing networks. We develop static and dynamic analytical models to analyze the behavior of peer-to-peer networks in the presence of free-riding. One commonly observed characteristics of peer-to-peer networks is that peers can consume network resources (e.g., content, processing power, storage) through downloading without providing resources to the network, known as free-riding. The free-riding behavior of "peers" can lead to an under provision of content and therefore will degrade the performance of P2P networks. Essay 2. Protecting online privacy: Self regulation, mandatory standards, or caveat emptor. In this essay we develop a model of asymmetric information, in which a retailer has private information regarding its own cost of protecting consumer privacy. We use this model to analyze retailers' strategies under three privacy protection regimes: Mandatory standards, where governments intervene and enact strict privacy protection standards for specific types of consumer information; Caveat emptor, where retailers are required by law to abide by any agreements they make with consumers to protect their privacy (e.g., through posted privacy policies), but are under no obligation to make such agreements; and Seal-of-approval programs (e.g., the programs offered by TRUSTe and Better Business Bureau), where retailers can choose---for a fee---to join a seal-of-approval program administered by a seal granting authority. We analyze the optimality of the regimes under different consumer preferences. Essay 3. The impact of shopbot use on prices and price dispersion: Evidence from disaggregate data. The growth of Internet price search tools, notably shopbots, has reduced consumers' search costs, allowing consumers to easily become informed of price and product characteristics among competing sellers online. This research seeks to fill a gap in the literature by analyzing the impact of changes in shopbot use over time on pricing behavior in the Internet book market. (Abstract shortened by UMI.)
Peer-to-peer (P2P) services allow users to share networked resources, notably bandwidth and content, from the edges of the network. These services have been popularized because of file sharing – ...particularly the sharing of unlicensed copyrighted files. However, content owners are increasingly exploring the ability of peer-to-peer networks to accommodate legitimate content distribution and promotion. In this article, we review the economic characteristics of P2P networks and outline the implications of these characteristics on efforts to counteract illegal piracy and on potential uses of P2P networks in a commercial media distribution strategy.
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