Chrysanthos Dellarocas

I posted a new working paper at SSRN. In this paper I am identifying an important, and previously unnoticed, negative side-effect of performance-based advertising: because, under performance-based regimes, advertisers pay publishers for every click or for every sale, they have an incentive to increase the price of their products above the optimal levels so that they generate a little fewer clicks or sales but make a little more per click or per sale. I show that this phenomenon is a variant of the well-known double marginalization problem and propose some ways of overcoming it while still retaining a performance-based flavor. Ultimately, however, my paper casts the whole notion of using performance-based advertising into question, at least for organizations that have worked together long-enough to have overcome major information asymmetries/trust issues.

Read the whole paper here.