Vertical Differentiation and a Comparison of Online Advertising Models

Designing business models that take into consideration the role of advertising support is critical to the success of online services. In this paper, we address the challenges of these business model strategies and compare different ad revenue models. We use game theory to model vertical differentiation in both monopoly and duopoly settings, in which online service providers may offer an ad-free service, an ad-supported service, or a combination of these services. Offering both ad-free and ad-supported services is the optimal strategy for a monopolist because ad revenues compensate for the cannibalistic effect of vertical differentiation. In a duopoly equilibrium, exactly one firm offers both services when the ad revenue rate is sufficiently high. Furthermore, we find that a higher ad revenue rate may lead to lower service prices. Consistently across both monopoly and duopoly settings, such price reductions are more severe in the cost-per-thousand-impressions model than in the cost-per-click model. Our findings emphasize the role of advertising revenues in vertical differentiation and offer strategic guidance for monetizing online services. © 2012 M.E. Sharpe, Inc. All rights reserved.link_to_subscribed_fulltex

The Role of the Mangement Sciences in Research on Personalization

We present a review of research studies that deal with personalization. We synthesize current knowledge about these areas, and identify issues that we envision will be of interest to researchers working in the management sciences. We take an interdisciplinary approach that spans the areas of economics, marketing, information technology, and operations. We present an overarching framework for personalization that allows us to identify key players in the personalization process, as well as, the key stages of personalization. The framework enables us to examine the strategic role of personalization in the interactions between a firm and other key players in the firm's value system. We review extant literature in the strategic behavior of firms, and discuss opportunities for analytical and empirical research in this regard. Next, we examine how a firm can learn a customer's preferences, which is one of the key components of the personalization process. We use a utility-based approach to formalize such preference functions, and to understand how these preference functions could be learnt based on a customer's interactions with a firm. We identify well-established techniques in management sciences that can be gainfully employed in future research on personalization.CRM, Persoanlization, Marketing, e-commerce,

Advertising, brand loyalty and pricing

This is the post-print version of the final paper published in Games and Economic Behavior. The published article is available from the link below. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. Copyright @ 2008 Elsevier B.V.I consider an oligopoly model where, prior to price competition, firms invest in persuasive advertising and induce brand loyalty in consumers who would otherwise buy the cheapest alternative on the market. This setting, in which persuasive advertising is introduced to homogeneous product markets, provides an alternative explanation for price dispersion phenomena. Despite ex ante symmetry, the equilibrium profile of advertising outlays is asymmetric. It follows that endogenously determined brand loyal consumer bases are not symmetric across firms. This raises a robustness question regarding Varian's “model of sales” where symmetry is exogenously assumed.IVI

Is Google the next Microsoft? Competition, Welfare and Regulation in Internet Search

Internet search (or perhaps more accurately `web-search') has grown exponentially over the last decade at an even more rapid rate than the Internet itself. Starting from nothing in the 1990s, today search is a multi-billion dollar business. Search engine providers such as Google and Yahoo! have become household names, and the use of a search engine, like use of the Web, is now a part of everyday life. The rapid growth of online search and its growing centrality to the ecology of the Internet raise a variety of questions for economists to answer. Why is the search engine market so concentrated and will it evolve towards monopoly? What are the implications of this concentration for different `participants' (consumers, search engines, advertisers)? Does the fact that search engines act as `information gatekeepers', determining, in effect, what can be found on the web, mean that search deserves particularly close attention from policy-makers? This paper supplies empirical and theoretical material with which to examine many of these questions. In particular, we (a) show that the already large levels of concentration are likely to continue (b) identify the consequences, negative and positive, of this outcome (c) discuss the possible regulatory interventions that policy-makers could utilize to address these

To Fund or Not to Fund: Assessment of the Potential Impact of a Regional Promotion Campaign

This paper develops a framework for assessing the potential economic impact of a regional promotion campaign combining contingent valuation methods with a partial displacement equilibrium model. The proposed approach is applied to the evaluation of the potential economic impact of the locally grown campaign in South Carolina. Results reveal that the first season of the promotion campaign increased consumer willingness to pay for produce by 3.4%. The change in consumer preferences and the corresponding shift in demand increased producer surplus by $3.09 million. This economic benefit, combined with the 2007 promotion campaign investment, resulted in a benefit-cost ratio of 6.18.contingent valuation, economic impact, equilibrium displacement model, regional promotion campaign, Consumer/Household Economics,

Regulating advertising in the presence of public service broadcasting

Television advertising levels in Europe are regulated according to the Audiovisual Service Media Directive where member states of the European Union usually impose stricter regulation on their Public Service Broadcasting (PSB) channels. The present model evaluates the effects of symmetric and asymmetric regulation of ad levels on competition for viewers and advertisers in a duopoly framework where a public and a private broadcaster compete. If both broadcasters face the same advertising cap, regulation can be profit-increasing for both channels. If the public broadcaster is more strictly regulated, this may benefit the commercial rival if higher revenues in the advertising market outweigh the loss in viewership. --media markets,two-sided markets

Consumer behavioural biases in competition: A survey

This is a survey of studies that examine competition in the presence of behaviourally biased or boundedly rational consumers. It will tackle questions such as: How does competition and pricing change when consumers are biased? Can inefficiencies that arise from consumer behavioural biases be mitigated by lowering barriers to entry? Do biased consumers make rational ones better or worse off? And will biased consumer behaviour be overcome through learning or education?Behavioural Economics, Industrial Organization, Biased Consumers

Two-Sided Markets with Negative Externalities

This paper analyses a two-sided market in which two platforms compete against each other. One side, the advertisers, exerts a negative externality on the ther side, the users. It is shown that if platforms can charge advertisers only, a higher degree of competition for users can lead to higher profits because competition on the advertisers' side is reduced. If platforms can charge users as well, profits might increase or decrease, the latter because of increased competition through the additional instrument of the user fee. Nevertheless the equilibrium with user fee is more efficient

Brands, Product Differentiation and EU Competition Law

The paper explores how EU competition law has integrated so far the concept of brands in different areas of enforcement. Although EU competition law has engaged in multiple instances with branding and product differentiation, brands do not yet constitute an operational concept in EU competition law. This is due to an important uncertainty as to the normative choices that need to be made with regard to the relation between brands and the formation of consumer preferences. The concerns raised by retailer power and the development of private labels also indicate that the existing economic theory on product differentiation may not also provide a complete picture on the effects of brands on the competitive process and ultimately on consumers. Competition law will also need to tackle the issues raised by the development of ‘social branding’ and the dialogic interaction between brand owners and consumers in the constitution of their brand identity