Skewed Bidding in Pay Per Action Auctions for Online Advertising

Networks, the Internet, and Cloud Computing, Internet and Search and Advertising

Article Snapshot

Author(s)

Nikhil Agarwal, Susan Athey and David Yang

Source

American Economic Review, 99(2): 441-447, 2009

Summary

This paper looks at problems that might arise with a “pay-per-action” (PPA) online advertising system.

Policy Relevance

The present "pay-per-click" avoids some cheating problems that a PPA might have. To work well, PPA systems should restrict actions and reporting of actions.

Main Points

  • The “pay-per-click” system for online advertising is most used now; the advertiser pays the search engine when a user clicks on the advertiser’s online ad. Problems like “click fraud” arise; when online publishers share ad revenues with search engines, they might be tempted to click on an ad many times.

  • The “pay-per-action” system (PPA) is one alternative; advertisers pay only when a user takes a designated valued action on the advertiser’s web site. But PPA systems have  problems.

  • To use PPA, a search engine would need to guess which actions are likely to be most frequent. Advertisers will know more about how holidays and other factors affect action rates.

  • Advertisers might want to choose which user actions they pay for. Advertisers also control their own web sites. These factors mean:
    • Advertisers can manipulate how their web sites record and report actions, or make it more or less likely that users take certain actions on their sites.
    • Advertisers might bid a large amount for a now-impossible action, getting a high ranking in the auction without needing to pay more.

  • To reduce manipulation, platforms like search engines that sell ad space would probably restrict the allowable actions to one type; or regulate how and when actions are reported.

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