Impression Effect vs. Click-through Effect: Mechanism Design of Online Advertising

Abstract

Search advertising and display advertising are two major online advertising formats. Search advertising emphasizes ads’ click-through effect. Advertisers only pay when users click the link of their ads. Traditional display advertising emphasizes ads’ impression effect. Most display ads are charged based on the number of views on the ads. Considering that most online ads increase brand awareness (impression effect) and directly promote sales (click-through effect), the not-emphasized effect in search advertising or display advertising actually has a significant impact on the market outcome. However, these impacts have been largely ignored. In this paper, we examine various mechanisms in search and display advertising by considering both ads’ impression effect and click-through effect. Interestingly, we show a seesaw relationship between ads’ two effects in search advertising. The advertiser whose advertisement has a strong click-through effect benefits relatively less from its impression effect. In display advertising, the real-time-bidding (RTB) mechanism considers both ads’ impression effect and click-through effect. It allows a publisher to gain more surplus than that through a static auction. However, we show that RTB is associated with a high risk of market failure.