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Strategic Bidding in Hybrid CPC/CPM Auctions

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Abstract

Websites increasingly allow advertisers to choose whether to bid for advertising on a per-impression or per-click basis. We present the first analysis of this new hybrid auction market. The conventional wisdom in this industry is that brand advertisers (e.g., Coca-Cola) will bid for impressions, while direct response advertisers (e.g., Amazon.com) will bid for clicks. We find that in an auction setting similar to that used by Facebook and Google, brand advertisers may have an incentive to bid for clicks, while simultaneously lowering their click through rates. We suggest a variant on the current hybrid auction used in practice to incent brand advertisers to bid for impressions, which leaves the seller of online advertising weakly better off.

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File URL: http://www.netinst.org/Zhu_Wilbur_08-25.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 08-25.

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Length: 21 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:net:wpaper:0825

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Web page: http://www.NETinst.org/

Related research

Keywords: Advertising; Auctions; Internet Marketing; Search Advertising;

This paper has been announced in the following NEP Reports:

References

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  1. Evans David S., 2008. "The Economics of the Online Advertising Industry," Review of Network Economics, De Gruyter, vol. 7(3), pages 1-33, September.
  2. Varian, Hal R., 2007. "Position auctions," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1163-1178, December.
  3. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
  4. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2005. "Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords," NBER Working Papers 11765, National Bureau of Economic Research, Inc.
  5. Börgers, Tilman & Cox, Ingemar & Pesendorfer, Martin & Petricek, Vaclav, 2008. "Equilibrium Bids in Sponsored Search Auctions: Theory and Evidence," MPRA Paper 29125, University Library of Munich, Germany.
  6. Danaher, Peter J. & Mullarkey, Guy W., 2003. "Factors Affecting Online Advertising Recall: A Study of Students," Journal of Advertising Research, Cambridge University Press, vol. 43(03), pages 252-267, September.
  7. Yongmin Chen & Chuan He, 2011. "Paid Placement: Advertising and Search on the Internet," Economic Journal, Royal Economic Society, vol. 121(556), pages F309-F328, November.
  8. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  9. Lohtia, Ritu & Donthu, Naveen & Hershberger, Edmund K., 2003. "The Impact of Content and Design Elements on Banner Advertising Click-through Rates," Journal of Advertising Research, Cambridge University Press, vol. 43(04), pages 410-418, December.
  10. Kenneth C. Wilbur & Yi Zhu, 2009. "Click Fraud," Marketing Science, INFORMS, vol. 28(2), pages 293-308, 03-04.
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