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Robust Advertisement Pricing

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  • Tan Gan
  • Hongcheng Li

Abstract

We consider the robust pricing problem of an advertising platform that charges a producer for disclosing hard evidence of product quality to a consumer before trading. Multiple equilibria arise since consumer beliefs and producer's contingent advertisement purchases are interdependent. To tackle strategic uncertainty, the platform offers each producer's quality type a menu of disclosure-probability-and-price plans to maximize its revenue guaranteed across all equilibria. The optimal menus offer a continuum of plans with strictly increasing marginal prices for higher disclosure probabilities. Full disclosure is implemented in the unique equilibrium. All partial-disclosure plans, though off-path, preclude bad equilibrium play. This solution admits a tractable price function that suggests volume-based pricing can outperform click-based pricing when strategic uncertainty is accounted for. Moreover, the platform prioritizes attracting higher types into service and offers them higher rents despite symmetric information between the platform and the producer.

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  • Tan Gan & Hongcheng Li, 2024. "Robust Advertisement Pricing," Papers 2404.06019, arXiv.org.
    • Handle: RePEc:arx:papers:2404.06019
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    References listed on IDEAS

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    1. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
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