Performance-based Pricing Models in Online Advertising: Cost per Click versus Cost per Action

The multibillion-dollar online advertising industry continues to debate whether to use the CPC (cost per click) or CPA (cost per action) model as an industry standard. This article applies the economic framework of incentive contracts to study the trade-o s of these pricing models. In some conditions, the CPA model leads to higher publisher (or advertiser) payo s than the CPC model. Whether publishers (or advertisers) prefer the CPA model over the CPC model depends on the advertisers' risk aversion, uncertainty in the product market, and the presence of advertisers with low immediate sales ratios. The study ndings indicate a con ict of interest between publishers and advertisers in their preferences for these two pricing models. This investigation further considers which pricing model o ers greater social welfare.