Information Asymmetry and Hybrid Advertising

Posted: 27 Oct 2010 Last revised: 6 May 2014

See all articles by De Liu

De Liu

University of Minnesota - Twin Cities - Carlson School of Management

Siva Viswanathan

University of Maryland - Robert H. Smith School of Business

Date Written: March 21, 2014

Abstract

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.

Keywords: Online Advertising, Pay-for-Performance, Information Asymmetry, Hybrid Pricing

JEL Classification: C72, D82, M37

Suggested Citation

Liu, De and Viswanathan, Siva, Information Asymmetry and Hybrid Advertising (March 21, 2014). Robert H. Smith School Research Paper No. RHS 06-139, Available at SSRN: https://ssrn.com/abstract=1698524 or http://dx.doi.org/10.2139/ssrn.1698524

De Liu (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Siva Viswanathan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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