76. Pricing Web Advertisement: Display Ads V.S. Contextual Ads

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1 11th Paifi-Aia Conferene on Inforation Syte 76 Priing Web Avertieent: Diplay A VS Contextual A Yung-Ming Li Intitute of Inforation Manageent National Chiao Tung Univerity, Taiwan yl@ailntueutw Jhih-Hua Jhang-Li Intitute of Inforation Manageent National Chiao Tung Univerity, Taiwan jhangli@gailo Abtrat Mot web ite provie iplay avertiing an ontextual avertiing ervie iultaneouly, whih are the ain a forat in Internet With ultieia forat, the priing of iplay a i generally bae on the ourrene of a ipreion However, targeting their utoer ore aurately, ontextual a are perforane bae avertieent an are harge only if one viitor lik a lient appointe a In thi paper, we evelop an eonoi oel to exaine the priing trategy, profitability, an oial effiieny of thee two heterogeneou web avertiing hannel, with repet to ifferent arket truture Keywor: Web avertieent, Diplay a, Contextual a, Copetition, Priing Strategie Introution The role of avertiing i to eliver the eage of iniviual prout to onuer (Soberan 2004) Fir purue higher expoure for prout beaue it ipree ore of the potential arket; thu, otivate onuer to purhae the prout Aoring to Internet Avertiing Revenue Report announe by IAB in 2006 April, Internet a revenue in the Unite State aounte over $125 billion for the full year 2005, up fro $96 billon reporte in 2004 The inreaing nuber ugget that Internet i one of ot funaental bran-builing oponent in arketing hannel The Internet a forat an be ivie into earh, iplay-relate avertiing, an laifie bae on revenue ranke fro high to low, aounting for ore than 90 perent of revenue uring thee two year ( Beie playing the role of ontent provier attrating ifferent type of uer, web ite ay arry ultieia avertiing to offer lient ore way to reah their target auiene an peifi arketing objetive Traitional a priing trategy ue in newpaper, raio, an televiion i bae on ot per thouan, abbreviate a CPT, whih ean the ot for howing the a to one thouan viewer Web ite ay guarantee an avertier the lowet nuber of ipreion, an abiguou ter tape on everyone in; however, noboy an how whether it i worth the prie to pay for the nuber of tie that web a are een by viitor Thi quetion te fro the theatrial ifferene between puhing an pulling Unlike traitional eia puhing eage to iniviual alternately in everyay life, people are ative in Internet an pull inforation through thi new eiu, whih ean that auiene have ability to rea preferre ontent an avert their eye fro a trap et by avertier (Shwartz 1997) Conequently, lik-thru rate (CTR), erive fro iviing the nuber of viitor who like on an a ebee in a web page by the nuber of tie that the web page wa elivere, beoe an inex for eauring the perforane of avertieent For exaple, Proter & Gable, one of bigget avertier in Aerian, wa the firt opany to ontrat with Yahoo to pay a fee groune on CTR in 1996 Sine lik behavior i ueful to eontrate online avertiing effetivene, the firt attept for oeling uh effet over

2 11th Paifi-Aia Conferene on Inforation Syte a relatively hort perio of tie ha been propoe by Chatterjee et al, whih highlight the iportane of expliit onuer ientifiation proeure to enhane the value of liktrea ata (Chatterjee et al 2003) Therefore, a new a priing ehani plu ontextual avertiing ha turne into the fou of attention beaue of a highly ot-effetive feature The rule i iple: lient et their bi for eah plaeent on etion or peifi page an only pay for a qualifie lik when a viitor lik on their a In other wor, lient an pay for perforane an fin their ot valuable target interete in a peifi type of ontent web ite offer For eah web page uh progra often repreent three to five ifferent a in a frae, eah inluing title, eription, an iplay URL, whoe ize often orrepon to a large retangle afforing to plae an inepenent iplay a The orer of plaeent i eterine by peifi rule bae on a obination of fator, uh a relevany, bi aount, lik-thru rate, an o on Therefore, utoer have no ability to know when their a appear on appointe web page, but know that the hane of expoure i influene by thee fator Conequently, if tie preure aue by thee fator i low or oerate, thi ee a reaonable an eonoi way for avertier to ontrol their buget an ipleent their arketing plan in Internet Beaue the expene to etablih an aintain an online aution-bae an pay-per-lik platfor i repetable, ot web ite ooperate with other fir whih onentrate on earh tehnique to reue their ot an take their profit fro eah page in pre-agree proportion The web ite jut opy an pate a blok of JavaSript oe to their web page an then ontent-relate a tart working without aintaining avertier relationhip Literature Review The effet avertiing i ainly eterine by a expeniture level, tie in arket, nuber of opetitor, an orer of entry (Vakrata et al 2004) To expan the entire arket an win arket hare, Ba et al (2005) efine avertiing a generi avertiing an bran avertiing aoring to the effet of avertiing, repetively Their reult ugget that generi an bran avertiing ut be properly oorinate for preventing uboptial alloation of avertiing buget Jeii et al (1999) eaure the effet of hange in avertiing an prootion poliie on ale an profit, uggeting that avertiing ha a poitive effet on bran equity in the long ter Prior reearh ugget eveloping one oon Web avertieent for all uer ay not be the ot effetive way to rive intene viitor to a ertain web ite (Korgaonkar an Wolin 2002) One of the funaental quetion that arketer fae in avertieent i how to ipleent target avertiing to peifi onuer an how to alloate their eia buget (Iyer et al 2005) In the reent tuie, Ki et al (2001) ue tree inution tehnique an ata-ining tool to generate arketing rule that ath utoer eographi, proviing peronalize avertieent eletion when a utoer viit an Internet tore Moel We onier an a priing proble where lient (a ponor) want to publih their avertiing on web ite through two ifferent hannel: iplay avertiing hannel or ontextual avertiing hannel A purhae ation i exeute by a lient an eah lient buy an a, whih oul be either avertiing exeute in the iplay a hannel or ontextual a hannel Thu, we enote the total a purhae aount uring a ertain tie interval in thi arket i 0 Alo, we ivie 0 into an, whih repreent the purhae aount with repet to iplay avertiing an ontextual avertiing, repetively The avertiing fee of iplay avertiing are harge on an ipreion bai; that i, no atter

3 11th Paifi-Aia Conferene on Inforation Syte whether a viitor lik lient a, the yte harge p for ipreion a long a the web page ontaining lient a i elivere to viitor brower On the ontrary, the avertiing fee of ontextual avertiing are harge on a lik bai; that i, no atter whether a viitor view lient a, the yte an t harge any fee until oeone lik lient a The prie of one lik i enote a p Notie that though both iplay an ontextual a oul be elivere in the ae webite, thee two heterogeneou avertiing platfor ay be operate a ingle (onopoliti) web avertiing hannel fir or two opetitive fir There are two ain type of effet (benefit) aue by web a: ipreion benefit an lik benefit Ipreion benefit athe the value of ipreing the viitor about the avertie prout or the fir, even without any further buine tranation However, lik benefit ainly onier the value evelope when viitor lik a peifi a to an appointe web ite Thu, lik benefit i eaure bae on revenue generating fro further buine tranation, wherea ipreion benefit i aoiate with value fro bran builing Diplay avertiing i preente in ultieia forat, wherea ontextual avertiing are preente a text only Thu, iplay a elivery better perforane in elivering the ipreion benefit We aue, the ipreion effet i heterogeneou to ifferent lient; therefore, we let the ipat fator of ipreion effeti of the lient be uniforly itribute within a unit interval A lient i with higher i ha higher intention to buil bran loyalty We enote ( )an ( )a ipreion benefit (lik thru rate) with repet to iplay avertiing an ontextual avertiing, repetively Alo, we enote the value fro the outoe of a lik a Therefore, eah lient hooing iplay avertiing an reeive benefit fro an ipreion; however, the expete benefit of liking effet he reeive i beaue the probability of a lik event ourring in iplay avertiing hannel i Siilarly, eah lient hooing ontextual avertiing an reeive benefit fro an a lik; however, the expete benefit of braning effet he reeive i beaue her a ight ha been elivere everal tie before her a i like by oeone Furtherore, beaue of the liite apaity of the avertiing platfor, we houl onier queuing effet A the avertiing platfor i hare by all the ubribe a, a ponor ut wait until the a ativity i oitte (eg an ipreion for iplay avertiing an a lik for ontextual avertiing) The ot of average waiting tie of iplay avertiing an ontextual avertiing are enote a w an w, repetively The waiting tie inreae a the nuber of lient in hannel ( an ) An avertiing upplier who provie iplay avertiing platfor an reue waiting tie by aggregating ore web ite to obtain uffiient traffi volue ( w beoe aller) Siilarly, the waiting tie of ontextual avertiing an alo be reue by high traffi volue; oreover, the auray of earh reult will help onue lient a ( w beoe aller) In other wor, the quality of earh engine i alo a key fator to reue tie ot for lient in ontextual avertiing hannel Thu, the payoff of a typial lient i i given by + i w p iplay a (an ipreion) i (31) + ( ) i w p ontexual a (a lik) Sine ultieia appeal to a variety of viitor than text oe, it i natural that > houl be a oon perpetive For the purpoe of expoition, we aue a zero; thu, an be interprete a the oparative ipreion benefit fro a with

4 11th Paifi-Aia Conferene on Inforation Syte ultieia iplay The payoff of a typial lient i i rewritten a + i w p iplay a (an ipreion) i (32) w p ontexual a (a lik) Beie, we aue ipreion an lik effet are uffiiently high ( > > w 0 ) uh that eah lient will purhae an a no atter whih a type he purhae Sine eah lient hooe a preferable a ervie fro iplay avertiing an ontextual avertiing, the arket-egentation onition i given by ˆ + w p w p, where the payoff a lient with type ˆ reeive i inifferent between thee two a ervie ˆ ( 1 ) + ( p p) + ( w w) (33) All lient inexe by 0, ˆ i hooe ontextual avertiing an the other lient inexe byi ˆ,1 prefer iplay avertiing Furtherore, ˆ reveal that iplay avertiing an inreae it arket hare by aking a trong ipreion on viitor or enhaning lik thru rate; likewie, ontextual avertiing an inreae it arket hare by enhaning the quality of earh engine o a to reue waiting tie a well a raie lik thru rate In other wor, ontextual avertiing will oupy the prevailing poition if earh engine an ath a to the ontent of web ite preiely Conequently, aoring to onition ˆ 0 an 0 +, the ean funtion of ultieia avertiing an ontextual avertiing are written a + w0 ( 1) p w0 + ( 1 ) + p an (34) + w + w + w + w 0 0 Priing in the Web Avertieent Market We firt exaine the priing trategy of a onopolize avertiing hannel fir whih provie iplay avertiing an ontextual avertiing iultaneouly, or offer a pure a ervie Subequently, we onier the ae that in thi arket there exit two leaer avertiing fir whih own ifferent opetitive avantage For exaple, Quigo i a wellknown web avertiing fir, onentrating on ontent-targete prout On the ontrary, e- aro i an innovative arketing opany that provie interative ultieia avertiing to help their utoer inreae ale an iprove braning effetivene Monopolize Avertiing Fir in the Market Sine fixe ot i irrelevant to fir final eiion on potal prie, we only onier arginal ot of iplay avertiing an ontextual avertiing, enote a an ; thu, the profit-axiization proble of onopolize a fir i given by Max p + p (41) p, p The arginal ot of iplay avertiing i oinate by ultieia eign ot an higher traniion ot ue to larger file ize On the ontrary, the arginal ot of ontextual avertiing i light beaue text-only forat an ave eigning ot an reue traffi; here, with the lo of generality, we aue a zero to iplify the profit-axiization proble Sine both the ean funtion of iplay avertiing an ontextual avertiing are aoiate with the relative prie of thee two ervie p p p, intea of olving

5 11th Paifi-Aia Conferene on Inforation Syte the firt orer onition with repet to p an p, we rewrite the objetive funtion a 1 Max {( ) ( ) 0 0 } p +p + w 1 p + p w p p, p + w + w 0 (42) It an be eaily oberve that the joint profit i linearly inreaing with p,an i onave on p Solving firt orer onition p 0, we fin the optial prie offet p ( + w0 ( 1 ) + ) 2 Then, the unit prie of ontextual avertiing houl be a high a poible uh that the profit i axiize It an be et to be a value atifying the equation w p 0 Hene, the ean funtion in thi hybri ervie are given by + w0 + 2w0 + ( 1 ) + p w 2( 0 + w + w), p p + p, (43) + w0 ( 1) + w0 + 2w0 + ( 1 ) +,an 2 + w + w 2 + w + w (44) 0 0 Obviouly, proviing hybri avertiing in web ite i alway better than either pure iplay avertiing or ontextual avertiing platfor a a pure avertiing approah beoe a peial ae of a hybri approah in whih one of ervie i loe Propoition 1 (A Monopoliti Web Avertieent Market) (a) Contextual a hannel i alway offere, while iplay a hannel i offere when lik through rate i uffiiently large uh that ˆ > 1 ( + w0 ) / (b) The prie of the iplay a (an ipreion) i greater than the prie of the ontextual a (a lik) if iplay a hannel i offere In aition, the ean of ontextual a i higher than that of iplay a Forally, p > 0 an < Dual Avertiing Fir in the Market Let u onier a iultaneou prie opetition between ultieia avertiing an ontextual avertiing ( )an p ( p ) are ente a the profit funtion an the prie of ultieia avertiing (ontextual avertiing), repetively The profit funtion are given by + w0 ( 1 ) p w 0 + ( 1 ) + p ( p ), p (44) 0 + w + w 0 + w + w Fro firt orer onition, p 0 an p 0, we erive the prie repone funtion of thee two ervie, whih are given by p + + w0 ( 1 ) + w 0 + ( 1 ) + p p( p) an p( p) (45) 2 2 Solving both equation iultaneouly, we have Nah equilibriu, w w0 ( 1 ) + 2 2w0 + + w0 + ( 1 ) + p, p (46) 3 3 Conequently, the ean funtion an the profit funtion are written a, 2 + w0 + 2w0 ( 1) + 2w0 + w0 + ( 1 ) +,, (47) 3 + w + w 3 + w + w 0 0

6 11th Paifi-Aia Conferene on Inforation Syte + w w We have p p p 3 Propoition 2 (ADuopoliti Web Avertieent Market) (a) The higher the lik thru rate of iplay avertiing,, the ore (le) expenive the iplay avertiing (ontextual avertiing) Forally, p / > 0,an p / < 0 (b) Both prie of iplay an ontextual a inreae a the ot of eign a iplay a, the ipreion effet of iplay a, the arket ize 0, but ereae with the traffi of the webite (aller w ) an the auray of ontextual earh engine (aller w ) () The prie heterogeneity of iplay a an ontextual a i aller Forally, p < p () The ean of ontextual a (iplay a) i lower (higher) in a opetitive arket Forally, < an > Analyi of Eonoi Effiieny In thi etion we onier a oially planne arket in whih both iplay avertiing an ontextual avertiing are offere Subequently, we opare oially optial reult with reoure alloation in the onopoliti arket an opetitive arket The effiieny of approah alloation i eaure by it oial welfare, whih i all u of lient payoff an the avertiing hannel provier In the following, we firt invetigate the harateriti of an effiient (or oial welfare axiizing) hannel alloation, whih i oial planner objetive for value-axiizing The oial welfare of the avertieent arket i given n byw + + Thu, the oially optial hoie an be foun by olving i 1 i optiization proble a follow: 0 1 Max W w, 0 w t + 0 (51) Solving thee progra yiel the reult of effiient alloation for eah hannel given by w + 2w0 ( 1) w 2w0 + ( 1 ) + an 0 + 2w + 2w 0 + 2w + 2w (52) Thu, it woul be oial optial if the relative prie of thee two ervie atifie w w w w + ( 0 + w + w) ( w + w) ( 1) p p p 0 + 2w + 2w (53) Propoition 3 (Effiient Market) If the arket ize i uffiient large or the arginal ot of iplay a i uffiient all, then the alloation of ontextual a in a oially planne arket i lower than that in a onopolize arket Conluion Diplay avertiing an ontextual avertiing are two iportant vehile for elivering web avertieent to viitor In thi paper, we have evelope an eonoi oel to tuy the opetene between ultieia avertiing an ontextual avertiing in either onopoliti or uopoliti arket In a opetitive arket ontextual avertiing turn into a powerful weapon to ake repetable revenue for fir onentrating on earh tehnique, threatening the poition of traitional ultieia avertiing Moreover, the equilibriu priing eiion an reulting ean itribution are ignifiantly aoiate with the

7 11th Paifi-Aia Conferene on Inforation Syte arket power of the fir if thee two approahe are operate by inepenent fir Our analytial reult how that it will be effiient to alloate uer appropriately aoring to the relation aong lik thru rate, lik utility an ipreion utility, in the abene of any priing hee Soially optial reult ugget that a oial planner houl et ath prie to otivate ore lient ue ontextual avertiing when the total arket ize i uffiient large In our oel we aue that web ite allot the ae avertieent pae to thee two a platfor In fat, ot web ite often alloate ore ontextual avertiing than ultieia avertiing uner the ae pae Thu, invetigating the orreponing priing trategie uner ifferent a pae i a planne future extenion Furtherore, we alo aue that the lik thru rate of ontextual avertiing i larger than that of ultieia avertiing However, there ee to be no iret eviene to upport thi viewpoint Thu, we ay relax thi etting to iover ore intereting inight in the future tuy On the other han, if eah lient bi bae on her buget an iniviual valuation, thi quetion will be laifie into Vikrey aution; thu, it i an intereting topi to tuy arket hare in the environent where the expoure rate of a i alo eterine by bi value Referene Ba, F M, Krihnaoorthy, A, Praa, A, an Sethi, S P Generi an Bran Avertiing Strategie in a Dynai uopoly Marketing Siene, 24, 4 (2005), Chatterjee, P, Hoffan, D L, an Novak, T P Moeling the Cliktrea: Ipliation for Web-Bae Avertiing Effort Marketing Siene, 22, 4 (2003), Internet Avertiing Revenue Report ap Iyer, G, Soberan, D, an Villa-Boa, J M The Targeting of Avertiing Marketing Siene, 24, (3) 2005, Jeii, K Mela, C F, an Gupta, S Managing Avertiing an Prootion for Long-Run Profitability Marketing Siene, 18, 1 (1999), 1-22 Ki, J W, Lee, B H, Shaw, M J, Chang, S H, an Nelon, M Appliation of Deiion- Tree Inution Tehnique to Peronalize Avertieent on Internet Storefront International Journal of Eletroni Coere, 5, 3 (2001), Korgaonkar, P an Wolin, L D Web uage, avertiing, an hopping: relationhip pattern Internet Reearh: Eletroni Networking Appliation an Poliy, 12, 2 (2002), Shwartz, E I Webonoi : Nine Eential Priniple for Growing Your Buine on the Worl Wie Web 1997 Soberan, D A Reearh Note: Aitional Learning an Ipliation on the Role of Inforative Avertiing Manageent Siene, 50, 12 (2004), Vakrata, D, Feinberg, F M, an Ba, F M The Shape of Avertiing Repone Funtion Reviite: A Moel of Dynai Probabiliti Threhol Marketing Siene, 23, 1 (2004),