Monetizing Online Marketplaces

64 Pages Posted: 16 Sep 2016 Last revised: 14 Jul 2018

Hana Choi

Duke University, Fuqua School of Business, Students

Carl F. Mela

Duke University - Fuqua School of Business

Date Written: June 26, 2018

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' valuation 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 fi nd that ranking items by consumer
utility lowers platform's profi ts as it leads to more lower-price item purchases. Combining
a ranking algorithm that sorts items by expected sales revenue with a CPC auction
limited to the top 5 positions improves profi ts the most, because this practice monetizes
the highest valuations for advertising on top, while enhancing 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 (June 26, 2018). Available at SSRN: https://ssrn.com/abstract=2839802 or http://dx.doi.org/10.2139/ssrn.2839802

Hana Choi (Contact Author)

Duke University, Fuqua School of Business, Students ( email )

Durham, NC
United States

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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