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CPC/CPA Hybrid Bidding in a Second Price Auction

20 Pages Posted: 18 Dec 2008  

Benjamin G. Edelman

Harvard University - HBS Negotiations, Organizations and Markets Unit

Hoan Soo Lee

Tsinghua University - School of Economics & Management

Date Written: December 17, 2008

Abstract

We develop a model of online advertising in which each advertiser chooses from multiple advertising measurement metrics - paying either for each click on its ads (CPC), or for each purchase that follows an ad-click (CPA). Our analysis extends classic auction results by allowing players to make bids using two different pricing schemes, while the driving information for bidders' endogenous selection - the conversion rate - is hidden from the seller. We show that the advertisers with the most productive sites prefer to pay CPC, while advertisers with lower quality sites prefer to pay CPA - a result that may be viewed as counterintuitive since low quality sites cannot proudly tout their conversion rates. This result holds even if an ad platform's assessment of site quality is correct in expectation. We also show that by offering both CPC and CPA, an ad platform can weakly increase its revenues compared to offering either alternative alone.

Suggested Citation

Edelman, Benjamin G. and Lee, Hoan Soo, CPC/CPA Hybrid Bidding in a Second Price Auction (December 17, 2008). Harvard Business School NOM Unit Working Paper No. 09-074. Available at SSRN: https://ssrn.com/abstract=1317763 or http://dx.doi.org/10.2139/ssrn.1317763

Benjamin G. Edelman (Contact Author)

Harvard University - HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://people.hbs.edu/bedelman

Hoan Soo Lee

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

HOME PAGE: http://www.sem.tsinghua.edu.cn/en/hoansoo

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