Cost-per-Impression Pricing for Display Advertising

Operations Research, Forthcoming

75 Pages Posted: 18 Nov 2013 Last revised: 3 Aug 2017

Kristin Fridgeirsdottir

London Business School

Sami Najafi Asadolahi

Santa Clara University - Leavey School of Business

Date Written: July 31, 2017

Abstract

Display advertising has currently 39% share of the online advertising market and is its fastest-growing category. In this paper, we consider an online display advertising setting in which a web publisher posts display ads on its website and charges based on the cost-per-impression (CPM) pricing scheme while promising to deliver a certain number of impressions on the ads posted. The publisher is faced with uncertain demand for advertising slots and uncertain supply of visits from viewers. Advertisers specify various attributes of viewers, and request their ads to be displayed only to those viewer types (targeting). We formulate the problem as a novel queuing system, where the advertising slots correspond to service channels with the service rate of each server synchronized with other active servers. We determine the publisher's optimal price to charge per impression and show that it can increase in the number of impressions made of each ad, which is in contrast to the quantity-discount commonly offered in practice. Furthermore, we show that the optimal CPM price may increase in the number of ads rotating among slots. This result is typically not expected because an increase in the number of rotating ads in the system can be interpreted as an increase in the service capacity. However, the fact that the effective service rate to each ad depends negatively on the number of rotating ads, causes the opposite impact.

Keywords: Queueing Systems; Online Advertising; Pricing; Markov Chains; Cost-per-impression

Suggested Citation

Fridgeirsdottir, Kristin and Najafi Asadolahi, Sami, Cost-per-Impression Pricing for Display Advertising (July 31, 2017). Operations Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2355835 or http://dx.doi.org/10.2139/ssrn.2355835

Kristin Fridgeirsdottir

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Sami Najafi Asadolahi (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

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