Information Asymmetry and Payment Schemes in Online Advertising

De Liu
University of Kentucky

Pay-for-performance advertising schemes such as pay-per-click (PPC) and pay-per-sale (PPS) have grown in popularity with the recent advances in digital technologies for targeting advertising and measuring outcomes. However, several publishers still continue to use well-established pay-per-impression (PPI) payment schemes. Given the choice of multiple payment schemes - PPI, PPC, and PPS - our study examines the role of information asymmetry between advertisers and publishers in determining the optimal payment scheme choices for publishers. We highlight the role of payment schemes as a means of leveraging private information available to publishers and advertisers. Our study identifies the conditions under which different types of publishers finds it optimal to offer PPI or pay-for-performance schemes. The choice of multiple payment schemes by a publisher is also analyzed. Our results provide insights into a number of commonly observed publisher strategies. We discuss the implications of our findings for advertisers, publishers and technology providers.

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