Information Asymmetry and Hybrid Advertising
University of Kentucky - Gatton College of Business and Economics
University of Maryland - Robert H. Smith School of Business
November 15, 2010
Robert H. Smith School Research Paper No. RHS 06-139
Pay-for-performance pricing schemes such as pay-per-click and pay-per-action have grown in popularity in Internet advertising. Meanwhile, the traditional pay-per-impression scheme persists, and several advertising providers have started to offer a hybrid mix of pay-per-impression and pay-for-performance schemes. Given the proliferation of pricing scheme choices - pay-per-impression, pay-per-click, pay-per-action, and hybrids - our study examines the optimal choices for advertising providers. We highlight the role of two-way information asymmetry in the choice of pricing schemes. Our study demonstrates a trade-off between using pay-for-performance schemes to reveal a provider's superior quality and using the pay-per-impression scheme to minimize allocative inefficiencies. Our study identifies conditions under which different providers opt for the same or different pricing schemes. We provide insights into a number of observed phenomena, including co-existence of multiple pricing schemes and growing popularity of hybrid pricing schemes.
Number of Pages in PDF File: 42
Keywords: Online Advertising, Pay-for-Performance, Information Asymmetry, Hybrid Pricing
JEL Classification: C72, D82, M37working papers series
Date posted: October 27, 2010 ; Last revised: February 24, 2013
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