Path to Purchase: A Mutually Exciting Point Process Model for Online Advertising and Conversion

Management Science, Vol. 60, No. 6, pp. 1392-1412, 2014

42 Pages Posted: 20 Sep 2012 Last revised: 27 Oct 2015

See all articles by Lizhen Xu

Lizhen Xu

Georgia Institute of Technology - Scheller College of Business

Jason A. Duan

University of Texas at Austin

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management

Date Written: September 15, 2012

Abstract

This paper studies the effects of various types of online advertisements on purchase conversion by capturing the dynamic interactions among advertisement clicks themselves. It is motivated by the observation that certain advertisement clicks may not result in immediate purchases, but they stimulate subsequent clicks on other advertisements which then lead to purchases. We develop a novel model based on mutually exciting point processes, which consider advertisement clicks and purchases as dependent random events in continuous time. We incorporate individual random effects to account for consumer heterogeneity and cast the model in the Bayesian hierarchical framework. We construct conversion probability to properly evaluate the conversion effects of online advertisements. Simulation algorithms for mutually exciting point processes are developed to compute the conversion probability and for out-of-sample prediction. Model comparison results show the proposed model outperforms the benchmark models that ignore exciting effects among advertisement clicks. We find that display advertisements have relatively low direct effect on purchase conversion, but they are more likely to stimulate subsequent visits through other advertisement formats. We show that the commonly used measure of conversion rate is biased in favor of search advertisements and underestimates the conversion effect of display advertisements the most. Our model also furnishes a useful tool to predict future purchases and advertisement clicks for the purpose of targeted marketing and customer relationship management.

Keywords: attribution model, online advertising, conversion, mutually exciting point process, multivariate stochastic model, search advertisement, display advertisement, business analytics

Suggested Citation

Xu, Lizhen and Duan, Jason A. and Whinston, Andrew B., Path to Purchase: A Mutually Exciting Point Process Model for Online Advertising and Conversion (September 15, 2012). Management Science, Vol. 60, No. 6, pp. 1392-1412, 2014. Available at SSRN: https://ssrn.com/abstract=2149920 or http://dx.doi.org/10.2139/ssrn.2149920

Lizhen Xu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

United States
404-894-4380 (Phone)
404-894-6030 (Fax)

Jason A. Duan

University of Texas at Austin ( email )

2110 Speedway
B6700
Austin, TX 78712
United States
5122328323 (Phone)

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-8879 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
669
Abstract Views
2,604
rank
37,716
PlumX Metrics