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On the Optimality of Clickthrough Fees in Online Markets

Authors


  •  Corresponding author: Michael R. Baye, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University, Bloomington, IN 47405, USA. Email: mbaye@indiana.edu.

  • We are grateful to Graeme Hunter, David Myatt, Daniela Simova and Dana Sisak for comments on earlier drafts.

Abstract

We study optimal fee setting decisions by a monopoly online platform connecting advertisers with potential buyers in two environments: a simple model that captures stylised features of advertising on search engines, social networks and advertisement-supported email; and a richer model that is more relevant for ‘directed’ search at price comparison sites. While the platform can choose to charge for both impressions and clicks, we show that the platform maximises profits by using clickthrough fees exclusively. Our model offers a rationale for the evolving practice of relying purely on clickthrough fees for revenues in many online advertising markets.

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