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INTRODUCTION
When selling banner space to advertisers, web publishers typically choose between two price regimes: pay-per-view (PPV) and pay-per-click (PPC). PPV means the advertiser pays a certain amount for each time a consumer opens the website and is exposed to the advertisement. PPC means that the advertiser pays only if the consumer clicks on the advertisement to read more about the product.1 Following the motivation by Mangani (2004), we examine the pricing strategy when web publishers are price takers in the market for banner advertisement.2
We obtain several results new to this literature. A price taking web publisher should choose either PPV or PPC, and not a combination of the two. The rate of clicks to views, or the click-through rate, is central to the pricing decision. Specifically, if the click-through rate is less than the ratio of PPV to PPC prices, then PPV should be chosen, and vice versa. When the click-through rate is exogenous, the optimal amount of advertising is the same under either pricing regime. Only under the strict condition that the click-through rate is exogenous and equals the ratio of PPV to PPC market prices may the web publisher use both price regimes simultaneously. In this case, however, the share of advertising sold through each price regime is irrelevant. Finally, we find that when the click-through rate is increasing in amount of advertising, the web publisher will choose a higher level of advertising under PPC than under PPV, and vice versa. In this case, the web publisher will never use both price regimes simultaneously.
Our work is complementary to that of Prasad et al. (2003).3 Looking at a wider context, they consider the correct mix of payments from subscribers (consumers) and advertisers. From advertisers, they consider an advertising rate per person without specifying further. We further detail this analysis into PPV of the advertisement or PPC on the advertising banner. Also, their model primarily deals with a monopolist web publisher, without examining effects of competition in detail. Our model considers a web publisher under perfect competition.
We present the model in the next section, the analysis in the subsequent section, and the conclusion in the last section.
MODEL
The market prices for web publishers selling advertising space on...