Monetizing Online Marketplaces

This paper considers the monetization of online marketplaces. These platforms trade off fees from advertising with commissions from product sales. Although featuring advertised products can make search less efficient (lowering transaction commissions), it incentivizes sellers to compete for better placements via advertising (increasing advertising fees). We consider this trade-off by modeling both sides of the platform. On the demand side, we develop a joint model of browsing (impressions), clicking, and purchase. On the supply side, we consider sellers’ valuations and advertising competition under various fee structures (cost-per-mille, cost-per-click (CPC), and cost-per-action) and ranking algorithms. Using buyer, seller, and platform data from an online marketplace where advertising dollars affect the order of seller items listed, we explore various product-ranking and ad-pricing mechanisms. We find that sorting items below the fifth position by expected sales revenue while conducting a CPC auction in the top 5 positions yields the greatest improvement in profits (181%) because this approach balances the highest valuations from advertising in the top positions with the transaction revenues in the lower positions.