Monetizing Online Marketplaces
64 Pages Posted: 16 Sep 2016 Last revised: 14 Jul 2018
Date Written: June 26, 2018
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 find that ranking items by consumer
utility lowers platform's profits 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 profits 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: Suggested Citation