In my June 2012 Management Science article “Double Marginalization in Performance-based Advertising: Implications and Solutions,” I explore an unexpected consequence of online pay-per-action systems (PPAs), such as the pay-per-click model—research that was recently highlighted by the Institute for Operations Research and Management Science (INFORMS) podcast series “The Science of Better.”
Listen to the full podcast at the INFORMS site The Science of Better.
Chris Dellarocas will become the new Chair of the Information Systems Department at Boston University’s School of Management, effective July 1, 2012. He will succeed Professor Paul Carlile in this position.
Current pay-per-click mechanisms can lead to higher product prices and lower social surplus (fortunately, they can be fixed!).
Check out the podcast discussing my recent Management Science paper “Double Marginalization in Performance-based Advertising: Implications and Solutions”
Podcast is available here.
Available from Articles in Advance, Management Science:
School of Management, Boston University, Boston, Massachusetts 02215, firstname.lastname@example.org
An important current trend in advertising is the replacement of traditional pay-per-exposure (pay-perimpression) pricing models with performance-based mechanisms in which advertisers pay only for measurable actions by consumers. Such pay-per-action (PPA) mechanisms are becoming the predominant method of selling advertising on the Internet. Well-known examples include pay-per-click, pay-per-call, and pay-per-sale. This work highlights an important, and hitherto unrecognized, side effect of PPA advertising. I find that, if the prices of advertised goods are endogenously determined by advertisers to maximize profits net of advertising expenses, PPA mechanisms induce firms to distort the prices of their goods (usually upward) relative to prices that would maximize profits in settings where advertising is sold under pay-per-exposure methods. Upward price distortions reduce both consumer surplus and the joint publisher–advertiser profit, leading to a net reduction in social welfare. They persist in current auction-based PPA mechanisms, such as the ones used by Google, Yahoo!, and Microsoft. In the latter settings they also reduce publisher revenues relative to pay-per-exposure methods. I show that these phenomena constitute a form of double marginalization and discuss a number of enhancements to today’s PPA mechanisms that restore equilibrium pricing of advertised goods to efficient levels, improving both consumer surplus as well as the publisher’s expected profits.
I got the official word from our Dean, Ken Freeman, while I was in India for the Digital Marketing Conference at the Indian School of Business. My colleagues Susan Fournier, Robert Marquez and Erol Pekoz were promoted as well. Congratulations to the entire “cohort.”
It feels truly great to have reached this far. It’s also kind of weird to think that I still have 20+ years of career with no other formal promotion to look forward to.
I guess it’s all about passion from now on!!!