Information Asymmetry and Hybrid Advertising
University of Kentucky - Gatton College of Business and Economics
University of Maryland - Robert H. Smith School of Business
March 21, 2014
Robert H. Smith School Research Paper No. RHS 06-139
Pay-for-performance (P4P) pricing schemes such as pay-per-click and pay-per-action have grown in popularity in Internet advertising. Meanwhile, the traditional pay-per-impression (PPI) scheme persists, and several advertising publishers have started to offer a hybrid mix of PPI and P4P schemes. Given the proliferation of pricing scheme choices, our study examines the optimal choices for advertising publishers. We highlight two-sided information asymmetries in online advertising markets and the consequent tradeoffs faced by a high-quality publisher using P4P schemes. When there exists information asymmetry, P4P pricing schemes enable a high-quality publisher to reveal her superior quality; on the other hand, they may incur allocative inefficiencies stemming from inaccurate estimates of advertiser qualities. Our study identifies conditions under which a publisher may opt for a PPI, P4P, or a hybrid scheme and in doing so provides a theoretical explanation for the observed variations in the pricing schemes across publishers. Using a new “uncompromised” equilibrium refinement, we also demonstrate that the hybrid scheme can emerge as an equilibrium choice in a wide range of conditions. In addition to explaining the co-existence of multiple pricing schemes and the growing popularity of hybrid pricing schemes, our study also provide prescriptive guidelines for firms making choices among different pricing schemes.
Number of Pages in PDF File: 49
Keywords: Online Advertising, Pay-for-Performance, Information Asymmetry, Hybrid Pricing
JEL Classification: C72, D82, M37working papers series
Date posted: October 27, 2010 ; Last revised: March 27, 2014
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