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Optimized Cost Per Click in Online Advertising: A Theoretical Analysis

Kaichen Zhang, Zixuan Yuan, Hui Xiong

Abstract

In recent years, Optimized Cost Per Click (OCPC) and Optimized Cost Per Mille (OCPM) have emerged as the most widely adopted pricing models in the online advertising industry. However, the existing literature has yet to identify the specific conditions under which these models outperform traditional pricing models like Cost Per Click (CPC) and Cost Per Action (CPA). To fill the gap, this paper builds an economic model that compares OCPC with CPC and CPA theoretically, which incorporates out-site scenarios and outside options as two key factors. Our analysis reveals that OCPC can effectively replace CPA by tackling the problem of advertisers strategically manipulating conversion reporting in out-site scenarios where conversions occur outside the advertising platform. Furthermore, OCPC exhibits the potential to surpass CPC in platform payoffs by providing higher advertiser payoffs and consequently attracting more advertisers. However, if advertisers have less competitive outside options and consistently stay in the focal platform, the platform may achieve higher payoffs using CPC. Our findings deliver valuable insights for online advertising platforms in selecting optimal pricing models, and provide recommendations for further enhancing their payoffs. To the best of our knowledge, this is the first study to analyze OCPC from an economic perspective. Moreover, our analysis can be applied to the OCPM model as well.

Optimized Cost Per Click in Online Advertising: A Theoretical Analysis

Abstract

In recent years, Optimized Cost Per Click (OCPC) and Optimized Cost Per Mille (OCPM) have emerged as the most widely adopted pricing models in the online advertising industry. However, the existing literature has yet to identify the specific conditions under which these models outperform traditional pricing models like Cost Per Click (CPC) and Cost Per Action (CPA). To fill the gap, this paper builds an economic model that compares OCPC with CPC and CPA theoretically, which incorporates out-site scenarios and outside options as two key factors. Our analysis reveals that OCPC can effectively replace CPA by tackling the problem of advertisers strategically manipulating conversion reporting in out-site scenarios where conversions occur outside the advertising platform. Furthermore, OCPC exhibits the potential to surpass CPC in platform payoffs by providing higher advertiser payoffs and consequently attracting more advertisers. However, if advertisers have less competitive outside options and consistently stay in the focal platform, the platform may achieve higher payoffs using CPC. Our findings deliver valuable insights for online advertising platforms in selecting optimal pricing models, and provide recommendations for further enhancing their payoffs. To the best of our knowledge, this is the first study to analyze OCPC from an economic perspective. Moreover, our analysis can be applied to the OCPM model as well.
Paper Structure (36 sections, 10 theorems, 37 equations, 3 figures, 1 table)

This paper contains 36 sections, 10 theorems, 37 equations, 3 figures, 1 table.

Table of Contents

  1. Introduction
  2. Related Literature
  3. Preliminary
  4. Model
  5. Settings
  6. Timeline
  7. in-site Scenario
  8. Cost Per Click
  9. Cost Per Action
  10. Optimized Cost Per Click
  11. out-site Scenario
  12. Cost Per Click
  13. Cost Per Action
  14. Optimized Cost Per Click
  15. Analysis
  16. ...and 21 more sections

Key Result

proposition 1

Under CPC, a dominant strategy for advertiser $i$ is to bid $b^i=\mu^p_im^i$, which is equal to the product of the expected conversion rate and the marginal gain from a conversion.

Figures (3)

  • Figure 1: U.S. Online Advertising Revenue and Pricing Model Milestones
  • Figure 2: Equilibrium Payoffs When the Outside Option $r$ is Varying
  • Figure 3: Cost Per Shopping Cart (CPSC) Example

Theorems & Definitions (10)

  • proposition 1
  • proposition 2
  • proposition 3
  • proposition 4
  • proposition 5
  • proposition 6
  • corollary 1
  • lemma 1
  • lemma 2
  • lemma 3