Pricing Models for Online Advertising: CPM vs. CPC.

Author List: Asdemir, Kursad; Kumar, Nanda; Jacob, Varghese S.;
Information Systems Research, 2012, Volume 23, Issue 3, Page 804-822.
Online advertising has transformed the advertising industry with its measurability and accountability. Online software and services supported by online advertising is becoming a reality as evidenced by the success of Google and its initiatives. Therefore, the choice of a pricing model for advertising becomes a critical issue for these firms. We present a formal model of pricing models in online advertising using the principal-agent framework to study the two most popular pricing models: input-based cost per thousand impressions (CPM) and performance-based cost per click-through (CPC). We identify four important factors that affect the preference of CPM to the CPC model, and vice versa. In particular, we highlight the interplay between uncertainty in the decision environment, value of advertising, cost of mistargeting advertisements, and alignment of incentives. These factors shed light on the preferred online-advertising pricing model for publishers and advertisers under different market conditions.
Keywords: asymmetric information; cost per click (CPC); cost per impression (CPM); delegation; online advertising; pricing models; principal-agent model
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List of Topics

#64 0.284 advertising search online sponsored keywords sales revenue advertisers ads keyword organic advertisements selection click targeting indirect listing promotional match generates
#191 0.142 model models process analysis paper management support used environment decision provides based develop use using help literature mathematical presented formulation
#195 0.101 pricing services levels level on-demand different demand capacity discrimination mechanism schemes conditions traffic paper resource expected based constraints solution latency
#151 0.087 costs cost switching reduce transaction increase benefits time economic production transactions savings reduction impact services reduced affect expected optimal associated
#176 0.087 e-commerce value returns initiatives market study announcements stock event abnormal companies significant growth positive using methodology investments period time initiative
#198 0.081 factors success information critical management implementation study factor successful systems support quality variables related results key model csf importance determinants