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Monetizing Online Marketplaces

Author

Listed:
  • Hana Choi

    (Simon School of Business, University of Rochester, Rochester, New York 14627)

  • Carl F. Mela

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract

This paper considers the monetization of online marketplaces. These platforms trade off fees from advertising with commissions from product sales. Although 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’ valuations and advertising competition under various fee structures (cost-per-mille, cost-per-click (CPC), and cost-per-action) 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 fifth position by expected sales revenue while conducting a CPC auction in the top 5 positions yields the greatest improvement in profits (181%) because this approach balances the highest valuations from advertising in the top positions with the transaction revenues in the lower positions.

Suggested Citation

  • Hana Choi & Carl F. Mela, 2019. "Monetizing Online Marketplaces," Marketing Science, INFORMS, vol. 38(6), pages 948-972, November.
    • Handle: RePEc:inm:ormksc:v:38:y:2019:i:6:p:948-972
    DOI: 10.1287/mksc.2019.1197
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    2. Xiang Hui & Meng Liu, 2022. "Quality Certificates Alleviate Consumer Aversion to Sponsored Search Advertising," CESifo Working Paper Series 9886, CESifo.
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    4. Rangaswamy, Arvind & Moch, Nicole & Felten, Claudio & van Bruggen, Gerrit & Wieringa, Jaap E. & Wirtz, Jochen, 2020. "The Role of Marketing in Digital Business Platforms," Journal of Interactive Marketing, Elsevier, vol. 51(C), pages 72-90.
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    6. Elliot Shin Oblander & Sunil Gupta & Carl F. Mela & Russell S. Winer & Donald R. Lehmann, 2020. "The past, present, and future of customer management," Marketing Letters, Springer, vol. 31(2), pages 125-136, September.
    7. Bo Zhou & Tianxin Zou, 2023. "Competing for Recommendations: The Strategic Impact of Personalized Product Recommendations in Online Marketplaces," Marketing Science, INFORMS, vol. 42(2), pages 360-376, March.
    8. Rafael P. Greminger, 2022. "Optimal Search and Discovery," Management Science, INFORMS, vol. 68(5), pages 3904-3924, May.
    9. Fei Long & Kinshuk Jerath & Miklos Sarvary, 2022. "Designing an Online Retail Marketplace: Leveraging Information from Sponsored Advertising," Marketing Science, INFORMS, vol. 41(1), pages 115-138, January.
    10. Shengjun Mao & Sanjeev Dewan & Yi-Jen (Ian) Ho, 2023. "Personalized Ranking at a Mobile App Distribution Platform," Information Systems Research, INFORMS, vol. 34(3), pages 811-827, September.
    11. Robert Donnelly & Ayush Kanodia & Ilya Morozov, 2024. "Welfare Effects of Personalized Rankings," Marketing Science, INFORMS, vol. 43(1), pages 92-113, January.
    12. Rafael P. Greminger, 2022. "Heterogeneous Position Effects and the Power of Rankings," Papers 2210.16408, arXiv.org, revised Dec 2023.
    13. Raluca Ursu & Stephan Seiler & Elisabeth Honka, 2023. "The Sequential Search Model: A Framework for Empirical Research," CESifo Working Paper Series 10264, CESifo.
    14. W. Jason Choi & Amin Sayedi, 2023. "Open and Private Exchanges in Display Advertising," Marketing Science, INFORMS, vol. 42(3), pages 451-475, May.

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