Hybrid Advertising Auctions

Abstract:     
Facebook and Google offer hybrid auctions that allow advertisers to bid on a per-impression or a per-click basis for the same advertising space, and these auctions could be offered by many other sellers of online advertising. The conventional wisdom is that brand advertisers (e.g. Coca-Cola) will bid per impression, while direct response advertisers (e.g. Amazon.com) will bid per click. We show that, if a publisher believes the conventional wisdom, its beliefs fail to hold in a static game: brand advertisers enter CPC bids, direct response advertisers may enter CPM bids, and publisher revenues suffer. Rational expectations require the publisher to disbelieve the conventional wisdom to eliminate revenue losses, in both a static and a dynamic context. Our results (a) directly contradict publisher statements, (b) imply that publishers should use past bid types to set click-through rate expectations, and (c) suggest that, conditional on setting rational expectations, publishers have no downside to offering hybrid auctions to advertisers.

Keywords: Advertising, Auctions, Internet Marketing, Search Advertising

Working Paper Series