Performance-Based Marketing on the Internet

Along with the wide use of the Internet, online advertising expense is soaring in the last decade. There are many pricing strategies for online advertisement, including fixed fees, click-through rates, and performance-based commission rates (i.e., referral fees). The trend towards profitability, along with better tracking tools, has resulted in less interest in fixed rates and more interest in performance-based commission rates, first adopted by Amazon.com. The key merit of performance-based advertising is that a publisher can choose which product or company to advertise based on its unique knowledge of viewers’ shopping preferences. Based on extant theories on advertisement, this paper investigates the equilibrium interaction between publishers and advertisers. A model with M publishers and one advertiser is established and the optimal strategies for both parties are discussed. We find that the advertiser’s optimal commission rate decreases when product price increases or the opportunity cost of the publisher decreases. Interesting extensions and implications of the findings are discussed as well.