Cost Per Incremental Action: Efficient Pricing of Advertising

37 Pages Posted: 3 Oct 2015

Date Written: October 1, 2015

Abstract

Advertisers seek to maximize profits by investing in advertising. We propose a “cost-per-incremental-action” (CPIA) pricing model which incorporates the causal contribution of advertising in order to achieve the advertisers' objectives such as profit maximization. CPIA pricing aligns marketplace incentives among all participants to help advertisers achieve their objectives via ad effectiveness and, by doing so, eliminates the adverse behaviors resulting from the misaligned incentives of commonly used pricing models. CPIA pricing can be implemented by adapting cost-per-action (CPA) bidding by either the ad platform or advertiser's bidding agent. We discuss CPIA pricing in the context of several examples, including recent empirical studies measuring the causal effects of advertising within the context of existing pricing models.

Keywords: Online advertising, Pay model, Experimentation, Ad effectiveness

JEL Classification: C93, L10, L20, L86, M37

Suggested Citation

Johnson, Garrett and Lewis, Randall A., Cost Per Incremental Action: Efficient Pricing of Advertising (October 1, 2015). Simon Business School Working Paper No. FR 15-29. Available at SSRN: https://ssrn.com/abstract=2668315 or http://dx.doi.org/10.2139/ssrn.2668315

Garrett Johnson (Contact Author)

Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
6173534677 (Phone)

HOME PAGE: http://www.bu.edu/questrom/faculty-research/faculty-directory/garrett-johnson/

Randall A. Lewis

Netflix ( email )

Los Gatos, CA
United States
312-RA-LEWIS (Phone)

HOME PAGE: http://www.econinformatics.com/

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