Monetizing Online Marketplaces

65 Pages Posted: 16 Sep 2016 Last revised: 30 Apr 2019

See all articles by Hana Choi

Hana Choi

University of Rochester - Simon Business School

Carl F. Mela

Duke University - Fuqua School of Business

Date Written: April 28, 2019

Abstract

This paper considers the monetization of online marketplaces. These platforms trade-off fees from advertising with commissions from product sales. While featuring advertised products can make search less efficient (lowering transaction commissions), it incentivizes sellers to compete for better placements via advertising (increasing advertising fees). We consider this trade-off by modeling both sides of the platform. On the demand side, we develop a joint model of browsing (impressions), clicking, and purchase. On the supply side, we consider sellers' valuations and advertising competition under various fee structures (CPM, CPC, CPA) and ranking algorithms.

Using buyer, seller, and platform data from an online marketplace where advertising dollars affect the order of seller items listed, we explore various product ranking and ad pricing mechanisms. We find that sorting items below the fifth position by expected sales revenue while conducting a CPC auction in the top 5 positions yields the greatest improvement in profits (181%) because this approach balances the highest valuations from advertising in the top positions with the transaction revenues in the lower positions.

Keywords: Online Advertising, E-Commerce, Two-Sided Market, Sequential Search Model, Dynamic Discrete Choice Model

JEL Classification: M31, M37, L11, L81, D83, C61

Suggested Citation

Choi, Hana and Mela, Carl F., Monetizing Online Marketplaces (April 28, 2019). Available at SSRN: https://ssrn.com/abstract=2839802 or http://dx.doi.org/10.2139/ssrn.2839802

Hana Choi (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
(585) 275-0790 (Phone)

HOME PAGE: http://hanachoi.github.io

Carl F. Mela

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7767 (Phone)

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