Economic Analysis of Reward Advertising

38 Pages Posted: 22 Aug 2017

See all articles by Hong Guo

Hong Guo

University of Notre Dame

Xuying Zhao

University of Notre Dame

Lin Hao

Fordham University - Gabelli School of Business

De Liu

University of Minnesota - Minneapolis

Multiple version iconThere are 2 versions of this paper

Date Written: August 16, 2017

Abstract

This paper investigates an emerging monetization mechanism for app developers – reward advertising. With reward ads, consumers have an option to view ads in exchange for a reward such as premium content. We investigate when and how an app developer should adopt reward ads as a mechanism for monetizing content. We identify two determinants – the revenue rate of the ads and the heterogeneity of consumers’ nuisance costs of viewing ads. When the ad revenue rate is low relative to consumers’ nuisance cost, the app developer should rely on content selling and not offer reward ads (i.e., the pure content-selling strategy). Otherwise, it is profitable for the app developer to offer reward ads alone (the pure reward-advertising strategy) or in combination with content selling (the hybrid strategy). When reward ads are offered, the hybrid strategy is more profitable if consumers are highly heterogeneous in nuisance costs; otherwise, the pure reward-advertising strategy is more profitable. Interestingly, we find that a high reward rate could decrease the number of reward ads viewed due to accelerated satiation. The optimal reward rate for the pure reward-advertising strategy may increase or decrease in consumers’ nuisance cost heterogeneity. Furthermore, when the proportion of low-nuisance-cost consumers is high enough, the total consumer surplus under the pure reward-advertising strategy is lower than those under the other two strategies. Our results provide practical guidance for app developers on when to use reward advertising, how to choose optimal rewards rates, and what to expect about its impact on consumers.

Keywords: Reward Advertising, Apps, Monetization, Consumer Surplus

JEL Classification: C72, D11, D21, M37, O31

Suggested Citation

Guo, Hong and Zhao, Xuying and Hao, Lin and Liu, De, Economic Analysis of Reward Advertising (August 16, 2017). Available at SSRN: https://ssrn.com/abstract=3020412 or http://dx.doi.org/10.2139/ssrn.3020412

Hong Guo (Contact Author)

University of Notre Dame ( email )

356 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

HOME PAGE: http://www.nd.edu/~hguo

Xuying Zhao

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Lin Hao

Fordham University - Gabelli School of Business ( email )

140 West 62nd Street
New York, NY 10023
United States

De Liu

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

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