Sharing Online Advertising Revenue with Consumers

Online service providers generate much of their revenue by monetizing user attention through online advertising. In this paper, we investigate revenue sharing, where the user is rewarded with a portion of the surplus generated from the advertising transaction, in a cost-perconversion advertising system. While revenue sharing can potentially lead to an increased user base, and correspondingly larger revenues in the long-term, we are interested in the effect of cashback in the short-term, in particular for a single auction. We capture the effect of cashback on the auction’s outcome via price-dependent conversion probabilities, derived from a model of rational user behavior: this trades off the direct loss in per-conversion revenue against an increase in conversion rate. We analyze equilibrium behavior under two natural schemes for specifying cashback: as a fraction of the search engine’s revenue per conversion, and as a fraction of the posted item price. This leads to some interesting conclusions: first, while there is an equivalence between the search engine and the advertiser providing the cashback specified as a fraction of search engine profit, this equivalence no longer holds when cashback is specified as a fraction of item price. Second, cashback can indeed lead to short-term increase in search engine revenue; however this depends strongly on the scheme used for implementing cashback as a function of the input. Specifically, given a particular set of input values (user parameters and advertiser posted prices), one scheme can lead to an increase in revenue for the search engine, while the others may not. Thus, an accurate model of the marketplace and the target user population is essential for implementing cashback.