Monetizing Online Marketplaces

64 Pages Posted: 16 Sep 2016 Last revised: 9 Oct 2018

See all articles by Hana Choi

Hana Choi

Duke University, Fuqua School of Business, Students

Carl F. Mela

Duke University - Fuqua School of Business

Date Written: August 22, 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 explore various product ranking and ad pricing mechanisms. We find that sorting items below the fi fth position by expected sales revenue, while conducting a CPC auction in the top 5 positions, yields the greatest improvement in profi ts (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 (August 22, 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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