Electronic Commerce Research and Applications

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1 Electronic Commerce Reearch an Application 8 (009) 16 7 Content lit available at ScienceDirect Electronic Commerce Reearch an Application journal homepage Pricing iplay a an contextual a Competition, acquiition, an invetment Yung-Ming Li *, Jhih-Hua Jhang-Li Intitute of Information Management, National Chiao Tung Univerity, Management Builing, 1001 Ta Hueh Roa, Hinchu 300, Taiwan article info abtract Article hitory Receive 5 December 007 Receive in revie form 16 May 008 Accepte 9 June 008 Available online 19 July 008 Keywor Diplay avertiing Contextual avertiing Pricing Search engine Multimeia technology Mot webite are imultaneouly upporte by iplay avertiing an contextual avertiing. In thi paper, we evelop an economic moel to examine the profitability of thee two a type in both a monopolitic market an uopolitic market, ientifying the influence of impreion benefit an click benefit. We fin that in the uopolitic market a rival channel profeional ability to enhance a viitor impreion i beneficial to the channel offering contextual avertiing. We alo fin that the trength of a earch engine i limite in the uopolitic market therefore, acquiition become a prime trategy to reveal the value of contextual avertiing. Ó 008 Elevier B.V. All right reerve. 1. Introuction The contribution mae by avertiing i to eliver the meage of iniviual prouct to conumer [63,47,48,17] thu, higher expoure for a prouct mean that it impree more of the potential market [60]. Accoring to Internet Avertiing Revenue Report announce by IAB in April 006, Internet a revenue in the Unite State amounte to over $1.5 billion for the full year 005, up from $9.6 billon reporte in 004 [30]. Roughly, iplay a an text-bae earch a occupy, repectively, 40% of online a ale. Large-cale Web portal or content ite, uch a AOL, CNET, an ESPN.com, may place iplay a on their ite an optimize a revenue by making the bet ue of their a inventory. Leaing channel provier, uch a DoubleClick, help avertier eliver their iplay a onto thee ite an allow them to monitor a effectivene. In thi way, avertier can reach their target auience, enhance cutomer tate by a content, an even rive potential cutomer to their webite via hyperlink. Diplay avertiing (alo known a banner a) i a rectangular graphic image which range from 10 to 500 pixel wie an from 45 to 10 pixel high [50], mot of them can be foun in large-cale Web portal or content ite. Compare to iplay a, text-bae earch a not only utilize the avantage of earch engine to improve a relevance by matching Web content with the avertier a, but alo make online avertiing acceible to mall avertier for the firt time [65]. In contrat, aociation with iplay avertiing an Web content will be ifficult if Web content varie with * Correponing author. Tel (ext ) fax are yml@mail.nctu.eu.tw (Y.-M. Li). time. Contextual avertiing, uch a Google ASene[1], i a type of text-bae earch a which often preent three to five ifferent a in a frame, each incluing title, ecription, an iplay URL. Publiher can apply Google ASene by completing an application form, logging into their private account, an putting a block of HTML into Web page. Then, when omeone view the Web page containing the coe (i.e., requet an repone between publiher Web erver an viitor brower), the viitor brower ownloa the Web page an iplay it. Since the coe inicate that ome component (i.e., a content) mut be ownloae from a particular Web erver, more requet an repone will not effue until all material are reay to how. The orer of contextual a i etermine by pecific rule bae on a combination of factor, uch a relevancy, bi amount, click-thru rate, an o on. By haring a common reource pool, avertier are willing to aopt contextual avertiing a their marketing tool if time preure caue by haring i low or moerate. Here, contextual avertiing i ifferent from keywor avertiing, where the latter ignifie that avertier bi for keywor on earch engine appearing next to the earch reult [4]. Even o, their operation principle an pricing mechanim are imilar a a reult, much reearch on keywor avertiing ha contribute to our tuy [1,43,67]. On the other han, even if contextual avertiing ha given a rie to competition preure, the role of iplay avertiing i till important. Firt, ue to the evelopment of multimeia technique, iplay a can capture viitor viually, by incorporating 3D graphic, vieo, oun, an more uer interactivity. For example, rich meia avertiing, uch a Flah a, provie an interactive interface for avertier to irectly collect their cutomer /$ - ee front matter Ó 008 Elevier B.V. All right reerve. oi /j.elerap

2 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) repone. Secon, becaue thee channel provier offering iplay avertiing are the firt mover in the market, they alreay have thouan of relationhip with excellent publiher that have come out on top aroun the worl [11]. Finally, builing bran equity remain an important tak for avertiing. Therefore, the current tren how that thee two ifferent avertiing type ten to merge into a giant in the Web avertiing market, uch a DoubleClick an Google. To ate, Google i the winner of the global earch market, controlling 70% market hare, wherea DoubleClick ha garnere 80% of the online iplay avertiing market [10]. Accoring to the article publihe on official Google Blog [65], Google conier that buying DoubleClick can complement Google earch an content-bae avertiing capabilitie, thereby benefiting all partie in the online avertiing buine. However, many iniviual an organization worry that Google legal framework for conumer privacy i inufficient an that the acquiition will make Google become the ominant player in the Web avertiing market [10] Problem an motivation An online avertiing market may involve the following partie avertier, channel provier, publiher, an viitor (ee Fig. 1). The role of publiher i to manage their webite an offer content which viitor are interete in viewing, wherea the function of channel provier i to erve a a brige between avertier an publiher, helping avertier publih their a in uitable webite manage by publiher an tranferring avertiing fee pai by avertier to publiher with a committe ratio. The traitional a pricing trategy ue in newpaper, raio, an televiion i bae on cot per thouan, known a CPM, which mean the cot for howing an a to one thouan viewer. Inee, channel provier may guarantee an avertier a certain number of impreion however, people have the ability to rea preferre content an avert their eye from an a trap et by the avertier [55]. A a reult, click-thru rate, erive from iviing the number of viitor who clicke on an a embee in a Web page by the number of time that the Web page wa elivere to viitor, ha become a popular benchmark for meauring avertiement performance. In orer to win market hare an gain better revenue, the channel provier have to carefully conier many factor when chooing their a price, uch a click-thru rate, the trength of a given impreion, uer bae, market power, an even the orer of the entrance to the market. Therefore, we utilize the Hotelling-type linear city moel to better unertan how two heterogeneou channel provier make their pricing eciion in the Web avertiement market, uch a DoubleClick an Google. Several key parameter are tuie in thi reearch, incluing impreion effect, click benefit, expecte elay time, an click-thru rate. We alo conier the cenario where thee two heterogeneou channel provier are merge into a ominant player with monopolitic power in the market. Avertier A Fee A Content Performance Reporting Channel Provier Coorination Requet (3) Repone (4) Publihing Fee Relate Work Repone () Fig. 1. The member of an online avertiing market. Publiher Viitor (Brower) Requet (1) We aim to are the following quetion. Firt, coul the higher quality of a earch engine boot the profit of the channel provier offering contextual a? Moreover, uner competition, what are the conition that woul lea to the increae (ecreae) of the channel provier profit? Secon, what i the ufficient conition for enuring that a market become efficient? I a earch engine company joining the avertiing market ocially beneficial from the view point of market efficiency (ocial welfare)? Finally, it i coniere that contextual text link lack the impreion effect therefore, o the quite high quality iplay a threaten the profit of contextual a? 1.. Contribution an fining In thi paper, we evelope an economic moel to examine the profitability among ifferent market tructure. We originally aume that click benefit an impreion benefit are two of the mot important capabilitie erive from Web avertiing. Click benefit mean the ability to eliver viitor who click a particular hyperlink in a Web page to an appointe webite, wherea impreion benefit repreent the power to influence viitor impreion of an avertie prouct or ervice. Conequently, we erive ome intereting fining an counterintuitive reult a follow. Firt, coul the higher quality of a earch engine boot the profit of the channel provier offering contextual a? In a uopolitic market, the anwer i poitive only if the impreion benefit generate by iplay avertiing i ufficiently low. Moreover, we fin that the profitability of each channel in a uopolitic market may increae with the channel marketing power an waiting time. Secon, what i the ufficient conition to enure that a market become efficient? We ugget that the click-thru rate of iplay avertiing can be ue a the conition. When the click-thru rate of iplay avertiing i low, a monopoly i more efficient than competition. However, when the click-thru rate of iplay avertiing i high, the oppoite hol true. Therefore, if tatitical ata how that the click-thru rate of iplay avertiing i at a higher level, a earch engine company joining the avertiing market will be beneficial to ociety. Thir, it i coniere that contextual text link lack the impreion effect therefore, o the quite high quality iplay a threaten the profit gaine by contextual a? The anwer i negative. It i coniere that the profitability of a channel offering contextual avertiing woul ecreae when it competitor ability to make an impreion on viitor become more avance. However, our reult how a contraictive reult in a uopolitic market. Furthermore, we invetigate how channel provier control pening on multimeia technology applie to iplay a an the quality of contextual earch, to maximize their profit. Our reult how that the actual trength of earch engine cannot be utilize in a uopolitic market therefore, it i likely to be one of the mot important reaon why Google acquire DoubleClick. The ret of the paper i organize a follow. The literature review i given in Section. The ingle-tage moel i evelope in Section 3. In Section 4 we icu pricing trategy an market efficiency (ocial welfare). In Section 5 the moel i extene to a two-tage game where the channel provier can etermine their invetment in multimeia technology an earch engine, in avance. Finally, we conclue thi paper an emphaize our fining in Section 6.. Literature review There are two type of avertiing frequently analyze in prior economic literature informative avertiing an peruaive avertiing [59]. The former eliver baic prouct information, uch a prouct price an point of ale, to target cutomer,

3 18 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) 16 7 wherea the primary goal of the latter i to trengthen conumer experience regaring an avertie prouct or ervice. The effect of avertiing i mainly etermine by a expeniture level, time in the market, number of competitor, an orer of entry [66]. Accoring to Jeii et al., avertiing ha a poitive effect on bran equity in the long term [33]. Becaue of two-way communication an conveying etaile information, the Web i perceive to be ifferent from mot meia [6,14]. Two-way communication, alo known a interactivity, i the reaon why Internet i more efficient than traitional meia for high involvement prouct [70]. Statitical ata alo exhibit that Internet a are more likely to be employe by companie in the automotive-an-urable an financial-ervice ector [40]. Although avertiement provie a majority of revenue for webite, increaing avertiing may repel viitor [18]. Therefore, etermining how to allocate a efficiently in a Web page, in orer to enhance revenue from a long-term viewpoint, become a valuable reearch iue [5]. For intance, a technique report how that expert in Microoft Reearch ha evelope an approach for efficiently elivering banner avertiement on the mn.com Web ite, running roughly 500 avertiement at a time [15]. In aition, Hofacker an Murphy [7] tuie how many clickable banner a houl appear on a ite. In their etting, the a price i pai for clicking on a link an pai in opportunity cot, wate time, connect time charge, an frutration. Their fining ugget that a ingle a on a page can afely a a econ banner to that page without impacting the click-thru rate for the firt a..1. Banner a Diplay avertiing (alo known a banner a) are one of the earliet format of Web avertiing. Brigg an Holli [7] meaure the impact of banner a by a proprietary ytem an their fining confirm the ual role of banner a in both irect repone an bran builing. Conumer often rely upon bran to guie their purchae eciion [8,46]. Ko et al. [37] foun that attitue towar the bran wa trongly affecte by attitue towar the ite, wherea attitue towar the bran will have a irectly poitive effect on purchae intention. Eng an Keh [0] invetigate the impact of avertiing an bran value on future operating an market performance. They howe that avertiing effect for the top bran can lat up to 4 year more important, both avertiing an bran value have poitive effect on bran ale an profitability. Li an Bukovac [41] foun that animate banner a reult in horter reaction time an better recall than o non-animate banner a, an that large banner a lea to more click than o mall banner a. Accoring to Xie et al. [68], proviing incentive in banner a i an effective technique for improving the click-thru rate... Contextual a Web content may have a ignificant impact on how avertiing meage are procee or evaluate by iniviual [58]. Prior reearch ha foun that contextual material are more likely to influence how conumer interpret avertiing meage a well a the bran [5,69]. Since page content can powerfully elf-elect viitor to that page, webpage context houl ratically influence click-thru behavior [7]. Therefore, even if earch engine firm, uch a Google, are new player in the Web avertiement market, their a prouct, contextual avertiing, can utilize their earch technique avantage to gain revenue from the market..3. Marketing trategy Two of the mot funamental quetion that marketer face in marketing are how to implement target avertiing to pecific conumer an how to allocate their meia buget [5,31,39]. Prior reearch ugget that eveloping one common Web avertiement for all uer may not be the mot effective way to rive intene viitor to a certain webite [38]. In recent tuie, Kim et al. ue tree inuction technique an ata-mining tool to generate marketing rule that match cutomer emographic, thereby proviing peronalize avertiement election when a cutomer viit an Internet tore [35]. Furthermore, becaue of the avancement of wirele technology, avertiing may be riven by location information, o that greater interaction between a viewer an avertier i poible [6,44]. Regaring avertiing trategie, Nguyen an Shi are the iue of optimal avertiing trategie that incorporate both market-hare ynamic an market-ize ynamic [49]. Saee et al. highlighte that avertiing pening alone ha only a negligible impact on firm performance thu, companie houl provie a better prouct-ownerhip experience to execute effective avertiing program [53]..4. Avertiing pricing Avertier willingne-to-pay i riven by the number of potential viewer that the a meage might reach [3]. Channel provier uually receive revenue in the following two way. Firt, an avertier pay by the impreion, referre to a cot per thouan (CPM) pricing, or the avertier pay for each time a viitor click on the a place in the content ite an ubequently viit the avertier ite, referre to a click through pricing [7]. Dreze an Huherr [19] uggete that urfer actually avoi looking at banner a uring their online activitie, an reveale that banner a will mot likely operate at the pre-attentive proceing level. Their reult how that banner avertiing ha a long-term impact beyon the immeiate click-through. Shen [57] pointe out that more than 90% of the reponent frequently ue conventional CPM to price banner a. On the contrary, contextual a get pai jut for click on the a in the content ite. Although a lot of attention ha been focue on click rate a a benchmark for ucce, avertier faith may be haken by click frau, which i generate by automate hacker program [9]. Banerjee an Banyopahyay contructe a multitage game theoretical moel of avertiing an price competition in a uopoly of ifferentiate prouct. Their fining exhibit that avertiing pening by a large firm provie a poitive externality on a mall firm profit [4]. Aneron an Coate [] coniere the commercial broacat market a a two-ie market an utilize the Hotelling moel [8] to tuy the relation between avertier an viewer. They howe that the equilibrium level of avertiing level may be too low or too high, epening on the nuiance cot to viewer, the ubtitutability of program, an the expecte benefit to avertier from contacting viewer. In thi paper, we alo aopt the Hotelling moel to formulate an avertiing pricing game. The player in thi etting are compoe of avertier an channel provier. A large number of urvey on thi moel can be foun in the work of Greenhut, Norman, an Hung [4]. Accoring to the blueprint of the moel, the goo ol by a firm i characterize a (p, h), where p an h are it price an are, repectively [54]. In aition to ecribing the itance between cutomer an firm (i.e., tranportation cot), the are can alo be aopte a the nature of the goo in ome other pectrum, uch a the preference of cutomer []. Each firm firt chooe it are (or chooe it price accoring to cutomer itribution) an then each cutomer woul make hi/her purchae eciion [16,9,56]. Here, iplay a an contextual a are two type of prouct that a channel provier can offer. We compare iplay a with contextual a uner a monopolitic etting [1,34,45] an uopolitic one [3,36,61]. In a monopolitic etting, a channel provier

4 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) can offer ifferentiate prouct with icriminate price level. In a uopolitic market, two channel provier offer ifferent type of a channel (one offer iplay a an the other offer contextual a) an chooe variou price level imultaneouly or equentially. The core of our reearch i to invetigate how thee channel provier, which offer a ervice, manipulate market price to achieve maximal profit. In fact, there i little information available on comparion of iplay avertiing an contextual avertiing. Therefore, we focu on how thee channel provier profit are altere with environment change, an then invetigate the influence of everal parameter, incluing the click-thru rate, impreion effect, click benefit, an expecte elay time. 3. The moel We conier an a pricing problem where avertier want to publih their avertiing on webite through two ifferent channel iplay avertiing channel or contextual avertiing channel. A purchae action i execute by an avertier an each avertier ecie whether to buy an a or not to buy at all. The avertier can chooe one of the channel to publih their a. Thu, we enote the total purchae amount of avertiing uring a certain time interval T in thi market a g 0. Alo, we ivie g 0 into g an g, which repreent the purchae amount with repect to iplay avertiing an contextual avertiing, repectively (ee Table 1 an for a complete lit of notation). The fee for iplay avertiing i charge on an impreion bai that i, no matter whether a viitor pecifically click on the avertier a, the channel provier charge p for impreion Table 1 Notation Notation g 0 Decription The total purchae amount of avertiing in thi market g (g ) The market hare of iplay avertiing (contextual avertiing) b (b ) The impreion benefit of iplay a (contextual a) c (c ) The click-thru rate of iplay a (contextual a) a (a ) The click benefit of iplay a (contextual a) w The coefficient of elay time in iplay a channel w The coefficient of elay time in contextual a channel h i The enitivity of impreion effect on the avertier i / i The enitivity of click effect on the avertieri p (p ) The price of iplay a (contextual a) ^h The threhol where the payoff the avertier i with type h i ¼ ^h receive i inifferent between iplay a an contextual a ~h The threhol where the payoff the avertier i with type h i ¼ ~ h receive i inifferent between buying an not buying a iplay a Dp The price heterogeneity of iplay a an contextual a, where Dp = p p Dp e The price heterogeneity of iplay a an contextual a in an efficient market K The pening on improving the click-thru rate of contextual a c (c ) The unit prouction cot of iplay avertiing (contextual avertiing) a long a the Web page containing avertier a i elivere to the viitor brower. On the contrary, the fee for contextual avertiing, enote a p, i charge on a click bai that i, no matter whether a viitor view an avertier a, the channel provier cannot charge any fee until omeone click the avertier a. There are two main type of effect (benefit) caue by Web a click benefit an impreion benefit. Impreion benefit catche the value of impreing viitor regaring avertie prouct or buine that will eventually reult in a ale, wherea click benefit mainly conier the value generate at the moment when a viitor i elivere to an appointe webite by clicking an a. In other wor, click benefit i meaure by the expecte revenue generate from irect repone, wherea impreion benefit i aociate with increaing bran awarene an purchae intent. In thi tuy, we aume that every avertiement ha the ame layout. To emphaize the characteritic of thee two avertiing type, we aume that contextual avertiing i compoe of text only, wherea iplay avertiing i preente in a multimeia format. Thu, iplay avertiing offer better performance than contextual avertiing oe in elivering impreion benefit. We enote c (c ) a click-thru rate, where the ubcript inicate to which channel the parameter belong. For example, repreent a contextual avertiing channel, wherea repreent a iplay avertiing channel. Alo, accoring to the channel provier marketing power, we enote click benefit an impreion benefit a a (a ) an b (b ), repectively. In thi paper, avertier are heterogeneou with repect to click benefit an impreion benefit, which are enote a / i an h i. Therefore, for avertier i, he can receive b h i from an impreion by chooing iplay avertiing however, the expecte benefit of click effect he receive i a - c / i becaue the probability of a click event occurring in a iplay avertiing channel i c. Similarly, he can receive a / i from an a click by chooing contextual avertiing however, the expecte benefit of impreion effect he receive i (b /c )h i becaue her a might have been hown everal time before the a i clicke by omeone. Furthermore, becaue of the limite capacity of an avertiing platform, we houl conier the expecte elay time. A the avertiing platform i hare by all ubcribe a, avertier mut wait until the a activity i committe (e.g. an impreion for iplay avertiing an a click for contextual avertiing). We aume that each avertier a ha the ame poibility to be rawn from the pool of a when an a requet arrive. Thu, accoring to geometric itribution, the expecte elay time to be electe (matche) i the number of avertier in a channel. In thi paper, we aopt linear waiting cot propoe by prior reearch [3,51,6] an then enote the cot of expecte elay time a w g an w g, where the coefficient, w an w, are epenent on the capacity of repective avertiing platform. The aumption of linear waiting time tem from the fact of ranom choice. Thu, the expecte waiting time of a ervice coul be linear for any ervice type that the ervice orer i etermine by ranom Table Notation Market type Channel Price Market hare Profit Social welfare Monopoly Diplay p pure Contextual p pure Mixe Diplay p m g m p m W m þ Contextual p m g m Duopoly Diplay p c g c p c W c þ Contextual p c g c p c g pure g pure p pure p pure a a Efficient Mixe Diplay Contextual a a g e g e a W e þ a The ymbol i omitte becaue we o not icu or analyze it in thi paper.

5 0 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) 16 7 election by the erver in which any job ha the ame probability to be choen for proceing. Since the waiting cot increae with the number of avertier in the channel, we call w g 0 (w g 0 ) the maximal waiting cot of a iplay avertiing channel (contextual avertiing channel). Conequently, the payoff of a typical avertier i i given by P i ¼ a c / i þ b h i w g p iplay aðan impreionþ a / i þðb =c Þh i w g p contexual aða clickþ ð31þ Since the weakne of text make it har to enhance viitor tate, it i natural that the value of b i light in thi paper. For the purpoe of expoition, we et b a zero thu, b can be interprete a the comparative impreion benefit from a with multimeia iplay. Since the click-thru rate of contextual avertiing iappear by our aumption (i.e., the term (b /c ) i remove from P i ue to b = 0), for the purpoe of concie writing, we ometime ue the abbreviate term CTR to repreent the click-thru rate of iplay avertiing in the following ection. Thu, the payoff of a typical avertier i can be rewritten a P i ¼ a c / i þ b h i w g p iplay aðan impreionþ a / i w g p contexual aða clickþ ð3þ In practice, if an avertier ha more click benefit ue to her bran power, he houl alo have more impreion benefit. Therefore, we aume / i = kh i + e, where h i i uniformly itribute within a unit interval. Furthermore, we make the uual aumption that the market i fully covere in equilibrium when both channel are offere that i, the following contraint are to enure that each avertier in the market will purchae an a. Firt, in thi market there exit at leat one avertier who conier that improving bran awarene i more important than irect repone (i.e., b >(e + k)a ). Secon, for each avertier in contextual avertiing channel, the benefit of elivering a viitor to her webite outweigh twice[] the maximal waiting cot (i.e., ea >w g 0 ). Thir, e i aume to be conierably larger than k. For the ake of implifying mathematical expreion an equation, we efine the following ymbol Dp p p,w ka c + b, X ka, C ea c, an K ea. Solving the market-egmentation equation W^h þ C w g p ¼ X^h þ K w g p yiel ^h ¼ðK C þ w g w g þ p p Þ=ðW XÞ, where the payoff an avertier with type ^h receive i inifferent between thee two a ervice. All avertier inexe by h i ½0 ^hš chooe contextual avertiing an the other inexe by h i ½^h 1Š prefer iplay avertiing. Finally, accoring to the conition g ¼ g 0^h an g0 = g + g, the eman function of iplay avertiing an contextual avertiing are given by g ¼ ðw XÞ ðk CÞþw g 0 Dp ððw XÞ=g 0 ð33þ g ¼ ðk CÞþw g 0 þ Dp ððw XÞ=g 0 ð34þ 4. Pricing in the web avertiement market In the firt part of thi ection, we conier a uopoly market where one channel offer iplay a an the other provie contextual a. For intance, Google an DoubleClick are two repreentative channel in the Web avertiement market. In orer to maximize iniviual profit, thee channel provier et their avertiing price bae on their own conieration. Subequently, we conier the cenario where thee two channel are merge. For intance, the fact that Google ha acquire DoubleClick for $3.1 billion [11 13] incur it rival complaint that it woul give Google an unfair monopolitic avantage in the Web avertiement market [64]. In thi paper, we ue the term mixe avertiing to repreent the buine trategy where the monopolitic channel provier imultaneouly offer iplay a an contextual a. Finally, we invetigate the feature of an efficient market from the viewpoint of ocial welfare Heterogeneou channel in a uopoly market Conier a uopoly market where two channel offer ifferent a ervice, forming a price competition between iplay avertiing an contextual avertiing. The unit prouction cot of contextual avertiing an iplay avertiing are enote a c an c, repectively. c i light becaue text-only format can ave eigning cot an reuce traffic here, without the lo of generality, we aume c a zero to implify the profit-maximization problem. Moreover, c i compoe of multimeia eign cot an tranmiion cot, where c < b enure that the channel offering iplay a can make a profit Simultaneou pricing competition Let u firt examine a imultaneou price competition between iplay avertiing an contextual avertiing. Since each channel ha iniviual bet-repone function (aee Appenix A) to the price announce by the other, the optimal price can be erive by equating thee two bet-repone function imultaneouly, which are given by p c ¼ ðw XÞ ðk CÞþðw þ w Þg 0 þ c ð41þ 3 p c ¼ ðw XÞþðK CÞþðw þ w Þg 0 þ c ð4þ 3 Plugging (4.1) an (4.) into (3.3) an (3.4) yiel the eman function of the uopoly market which are given by g c ¼ ðw XÞ ðk CÞþðw þ w Þg 0 c ð43þ 3ððW XÞ=g 0 g c ¼ ðw XÞþðK CÞþðw þ w Þg 0 þ c ð44þ 3ððW XÞ=g 0 Thu, we can erive each channel profit from p c ¼ðpc c Þg c an p c ¼ðpc c Þg c a follow p c ¼ ððw XÞ ðk CÞþðw þ w Þg 0 c Þ ð45þ 9ððW XÞ=g 0 p c ¼ ððw XÞþðK CÞþðw þ w Þg 0 þ c Þ ð46þ 9ððW XÞ=g 0 (All relate analytical reult can be foun in Table 3.) For the ake of implifying the icuion, we term the channel offering iplay avertiing a channel 1 an the other a channel. Intuitively, each channel price (profit) houl increae with it own marketing power an ecreae with the other. Thi can be hown by ifferentiating p c ðpc Þ an pc ðpc Þ with repect to a ana. Propoition 1 (imultaneou competition in a uopoly web a market). (a) A long a the impreion benefit of iplay avertiing i ufficient, each channel profit become greater when the expecte elay time in any channel increae. Formally, ðop c =ow Þ > 0, ðop c =ow Þ > 0, ðop c =ow Þ > 0. Moreover, ðop c =ow Þ > 0 if b > (k + e)(a a c )+c (all the proof can be foun in the appenix).

6 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) Table 3 Price, market hare, an profit in a monopoly market an uopoly market Market an channel type Price Market hare Profit Monopoly D W þ C þ c W þ C c W þ C c g g 0 W þ w g 0 0 W þ w g 0 C K w g 0 g 0 (K w g 0 )g 0 See (4.5) g m ¼ ðw XÞþðK CÞþw g 0 þ c ððw XÞ=g 0 þ w þ wþ ðw XÞþðK CÞþw g 0 þ c ððw XÞ=g 0 þ w þ wþ M p m ¼ K w ððw XÞ=g 0 þ w Þ g m ¼ ðw XÞ ðk CÞþwg 0 c ððw XÞ=g 0 þ w þ wþ p m ¼ C w g þ ðw XÞþðK CÞþw g 0 þ c ¼ C w 0 ððw XÞ=g 0 þ w þ wþ ððw XÞ ðk CÞþðw þ wþg 0 c Þ 9ððW XÞ=g 0 þ w þ wþ ðw XÞ ðk CÞþðw þ wþg 0 c 3ððW XÞ=g 0 þ w þ wþ ðw XÞ ðk CÞþðw þ wþg 0 þ c 3 Duopoly (imultaneou) D ððw XÞþðK CÞþðw þ wþg 0 þ c Þ 9ððW XÞ=g 0 þ w þ wþ ðw XÞþðK CÞþðw þ wþg 0 þ c 3ððW XÞ=g 0 þ w þ wþ ðw XÞþðK CÞþðw þ wþg 0 þ c 3 C ððw XÞ ðk CÞþðw þ wþg 0 c Þ 8ððW XÞ=g 0 þ w þ wþ ðw XÞ ðk CÞþðw þ wþg 0 c 4ððW XÞ=g 0 þ w þ wþ ðw XÞ ðk CÞþðw þ wþg 0 þ c Duopoly (iplay firt) D ððw XÞþðK CÞþð3w þ wþg 0 þ c Þ 16ððW XÞ=g 0 þ w þ wþ ðw XÞþðK CÞþð3w þ wþg 0 þ c 4ððW XÞ=g 0 þ w þ wþ ðw XÞþðK CÞþð3w þwþg0 þc 4 C ð3ðw XÞ ðk CÞþðw þ 3wÞg 0 c Þ 16ððW XÞ=g 0 þ w þ wþ 3ðW XÞ ðk CÞþðw þ 3wÞg 0 c 4ððW XÞ=g 0 þ w þ wþ 3ðW XÞ ðk CÞþðw þ 3wÞg 0 þ 3c 4 Duopoly (contextual firt) D ððw XÞþðK CÞþðw þ wþg 0 þ c Þ 8ððW XÞ=g 0 þ w þ wþ ðw XÞþðK CÞþðw þ wþg 0 þ c 4ððW XÞ=g 0 þ w þ wþ ðw XÞþðK CÞþðw þ wþg 0 þ c C D, iplay avertiing C, contextual avertiing M, mixe avertiing. (b) The competitor profeional ability to trengthen the avertier impreion i beneficial to the channel offering contextual avertiing. Formally, ðop c =ob Þ > 0 if an only if b > (k + e)(a a c )+c w g 0. In Propoition 1, we fin that the negative factor with repect to ervice quality, incluing w an w, are poitive to both channel profit in the uopoly market. Both channel bet-repone function reveal that each channel will raie it a price when the other price or expecte elay time increae. Once each channel reuce it a price or time waiting for an expoure chance, the other woul lower it price in repone. Conequently, the final reult woul be mutually wouning. Therefore, both channel profit can be enhance by increaing elay time becaue low quality ervice can relax price competition. However, by crutinizing op c =ow, we fin that p c form a convex curve[3] with the parameter w when impreion benefit i ufficiently mall (i.e., (W X)<(K C)+c ), where the bottom of the curve i enote a w ¼½ðK CÞþc ðw XÞŠ=g 0. The reult how that channel profit increae eventually with it elay time (i.e., w > w Þ however, channel profit alo increae with the quality of contextual earch when w < w hol. Inee, high quality ervice reult in the competitor price cut however, it may turn into a poitive factor for channel when the competitor ability to enhance viitor impreion i not uperior. Therefore, excellent earch engine will ominate the uopoly market when the function of iplay avertiing cannot be ientifie. Moreover, we ifferentiate p c with repect to impreion benefit for oberving the impact of impreion benefit on channel. By crutinizing op c =ob, we fin that channel profit[4] increae along with impreion benefit, a long a b i larger than (k + e)(a a c )+c w g 0. Inee, it i coniere that channel profit woul ecreae when the competitor ability to enhance the viitor impreion become excellent. However, thi counterintuitive reult exhibit that channel 1 with profeional experience an ability on image builing i eventually beneficial to channel profit. The reaon for thi counterintuitive reult i a follow. When channel 1 ability to make an impreion on viitor become outtaning, it can charge a higher price an even boot market hare ðog c =ob > 0Þ. Actually, the market hare of contextual avertiing ecreae ðog c =ob < 0Þ however, channel price can be raie to compenate for the lo of eclining market hare by following channel 1 price an then the final reult become beneficial to both channel Sequential pricing competition Subequently, we icu the impact of the orer of pricing eciion on both channel profit. Suppoe that channel 1 an channel are the incumbent an entrant in the Web avertiement market an make their pricing eciion in perio 1 an, repectively. Thu, the bet repone function of channel to the incumbent i the ame a that ariing from imultaneou eciion. Utilizing a backwar inuction approach, the optimal price are given by p c firt ¼ ðw XÞ ðk CÞþðw þ w Þg 0 þ c ð47þ p c lat ¼ ðw XÞþðK CÞþð3w þ w Þg 0 þ c ð48þ 4 By the ame approach a imultaneou pricing competition, the eman function an profit of the uopoly market are given by

7 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) 16 7 g c firt ¼ ðw XÞ ðk CÞþðw þ w Þg 0 c ð49þ 4ððW XÞ=g 0 g c lat ¼ ðw XÞþðK CÞþð3w þ w Þg 0 þ c 4ððW XÞ=g 0 ð410þ p c firt ¼ ððw XÞ ðk CÞþðw þ w Þg 0 c Þ 8ððW XÞ=g 0 ð411þ p c lat ¼ ððw XÞþðK CÞþð3w þ w Þg 0 þ c Þ 16ððW XÞ=g 0 ð41þ Next, we exchange the role of the channel provier. Similarly, we get the following equilibrium reult by backwar inuction approach p c firt ¼ ðw XÞþðK CÞþðw þ w Þg 0 þ c ð413þ p c lat ¼ 3ðW XÞ ðk CÞþðw þ 3w Þg 0 þ 3c 4 ð414þ g c firt ¼ ðw XÞþðK CÞþðw þ w Þg 0 þ c 4ððW XÞ=g 0 ð415þ g c lat ¼ 3ðW XÞ ðk CÞþðw þ 3w Þg 0 c 4ððW XÞ=g 0 ð416þ p c firt ¼ ððw XÞþðK CÞþðw þ w Þg 0 þ c Þ 8ððW XÞ=g 0 ð417þ p c lat ¼ ð3ðw XÞ ðk CÞþðw þ 3w Þg 0 c Þ 16ððW XÞ=g 0 ð418þ We fin that all reult in Propoition 1 can be applie to the equential game irectly with little change. Moreover, we fin that p c lat > pc firt > pc an pc lat > pc firt > pc. Compare to the reult of imultaneou price competition, both channel et higher price an collect greater profit uner equential competition. When a channel provier make a pricing eciion in the firt perio, he preict that the entrant will lightly unercut her price in orer to obtain a larger market hare. The preiction put preure on the incumbent to maintain a relatively high price in orer to avoi having the entrant et a very low market price. Hence, both channel et price higher than the price level of imultaneou price competition. Since the entrant can et a lightly lower price than the incumbent to boot her profit ignificantly, both channel provier prefer equential price competition an wih to know her opponent price information. Thi obervation may be one of the reaon that only a few channel are willing to publih price information of banner a on their webite. 4.. A channel provier create monopolitic power through acquiition Here, we aume that the channel offering iplay avertiing i merge with the channel offering contextual avertiing therefore, the latter create monopolitic power by acquiition in the Web avertiement market. Now, the channel provier can elect to offer both a ervice imultaneouly or hut own one of the a ervice. If the channel provier hut own the iplay avertiing channel, the market i fully covere by contextual avertiing channel (i.e., g pure ¼ g 0 ). The optimal price of contextual avertiing an maximal profit are given by p pure ¼ K w g 0 an p pure ¼ Kg 0 w g 0, repectively. Next, if the channel provier hut own contextual avertiing channel, the eman function of iplay avertiing i given by g pure 8 >< g 0 ¼ > p pure 6 C w g 0 ð1 ~ hþg 0 C w g 0 6 p pure 6CþW 0 p pure P CþW where ~ h ¼ w g 0 þp C Wþw g 0 ð419þ The value[5] of ~ h repreent that the avertier inexe by h i ¼ ~ h i inifferent between buying or not buying a iplay a. Thu, the optimal price[6] of iplay avertiing an maximal profit are given by p pure ¼ðW þ C þ c Þ= an p pure ¼ ½ðW þ C c Þ=Š ½g 0 =ðwþ w g 0 ÞŠ, repectively. Finally, if offering mixe avertiing, the channel provier face the profit-maximization problem a follow Max p m ¼ðp m p m c Þg m þðpm c Þg m ð40þ pm Solving the profit-maximization problem yiel the optimal price given by ðw p m XÞþðK CÞþw ¼ K g w 0 þ c ð41þ ððw XÞ=g 0 p m ¼ C w g 0 þ ðw XÞþðK CÞþw g 0 þ c ððw XÞ=g 0 ððw XÞ=g 0 þ w Þ ð4þ Plugging (4.1) an (4.) into (3.3) an (3.4) yiel the eman function of the mixe avertiing channel, which are given by g m g m ¼ ðw XÞþðK CÞþw g 0 þ c ð43þ ððw XÞ=g 0 ¼ ðw XÞ ðk CÞþw g 0 c ð44þ ððw XÞ=g 0 Thu, we can erive the monopolitic channel profit p m a follow p m ¼ Cg 0 w g 0 þ ððw XÞþw g 0 þðk CÞÞ c 4ððW XÞ=g 0 ðw XÞþw g c 0 ðk CÞ c ð45þ ððw XÞ=g 0 If both channel can be merge into one giant provier in the Web avertiement market, the profit of mixe avertiing will be uperior becaue the monopolitic channel provier can egment avertier accoring to their interet. Propoition (monopoly pricing in a web avertiement market). (a) Mixe avertiing woul be the bet trategy except when the importance of bran builing an CTR are ufficiently mall. In thi cae, the channel provier woul hut own the iplay avertiing channel. Formally, when b 6 (k + e)(a a c ) w g 0 +c hol, p m i equal to p pure. (b) If proviing mixe avertiing i the bet trategy, the price of iplay a (an impreion) i greater than that of contextual a (a click). (c) The eman of contextual avertiing (iplay avertiing) in the monopolitic etting i higher (lower) than that in the uopoly market. Formally, g c < gm an g c > gm. Here, we ue comparative tatic analyi by varying the expecte elay time to invetigate the pricing trategy of the channel provier offering mixe avertiing. We fin that the monopolitic channel eek to maximize the total profit in orer to utilize it reource optimally therefore, when the reource i hrinking, the only repone of the channel for eclining quality i to lower the price of each avertiement, which can be hown by ðop m =ow Þ < 0, ðop m =ow Þ < 0, ðop m =ow Þ < 0, an ðop m =ow Þ < 0. Conequently, when the expecte elay time increae, the number of avertiement in a congete channel ecreae an that in the other channel increae, which can be verifie by ðog m =ow Þ < 0, ðog m =ow Þ > 0, ðog m =ow Þ > 0, an ðog m =ow Þ < 0. Fig. 3 [7] how the comparion of profit between the monopolitic channel provier an two heterogeneou channel provier in the Web avertiement market,

8 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) where the x-axi of the figure i the click-thru rate of iplay avertiing. We fin that the monopolitic channel provier can utilize contextual avertiing to acquire enormou benefit contrarily, becaue of competition, the trength of contextual avertiing i limite in the uopoly market Analyi of market efficiency At the en of thi ection, we conier an efficient market in which iplay avertiing channel an contextual avertiing channel are offere, where the cope of our coniere market i compoe of avertier an channel provier. The efficiency of a market refer to the welfare apect of the market interaction. In other wor, market efficiency meaure invetigate whether the interaction in the market lea to a eire outcome. There i a traeoff between the avertier benefit erive from acquiring the viitor attention an the channel provier operating cot impoe on howing the avertiement, which efine a welfare function. Our goal i to utilize the welfare function to etermine the optimal balance between the avertier benefit an the cot of channel allocation. For intance, a thir party, uch a the Better Buine Bureau, often play the role of reolving iniviual ipute an offer effective ipute reolution program. Here, the market efficiency of an avertiing market i given by W þ ¼ P n i¼1 P i þ p þ p. Maximizing the ocial welfare of the Web avertiement market i equivalent to olving the following optimization problem MaxW þ ¼ðXE½h j ŠþK w g g g p Þg þp þðwe½h i ŠþC w g p Þg þp tg þg ¼g 0 h j 0 g an h g i g 1 ð46þ 0 g 0 Thu, the eman in the efficient market are given by g e ¼ ðw XÞ ðk CÞþw g 0 c ðw XÞ=g 0 þ w þ w g e ¼ ðk CÞþw g 0 þ c ðw XÞ=g 0 þ w þ w an ð47þ Moreover, if a market i efficient, it price heterogeneity (i.e., p p = Dp e ) mut atify Dp e ¼ ðw XÞw þððw XÞ=g 0 þ w þ w Þc ðw þ w ÞðK CÞ ðw XÞ=g 0 þ w þ w Propoition 3 (efficient market). Form the viewpoint of an efficient market, the channel provier which ha monopolitic power houl Profit c π m π m π Social Welfare c W + e W CTR Fig. 3. The market efficiency among ifferent market. increae (ecreae) the number of avertier in iplay avertiing channel (contextual avertiing channel). Formally, g e > gm an g e < gm. The market hare of iplay avertiing in the efficient market emontrate that the monopolitic channel provier utilize iplay avertiing to erve top avertier in the market however, from the viewpoint of market efficiency, the monopolitic channel provier houl boot the market hare of iplay avertiing by reucing the price of iplay avertiing. Moreover, uing the ame parameter a in Fig. an 3 how that market efficiency in the monopolitic etting i better than that in the uopoly market, when CTR i low however, the oppoite hol true when CTR i high enough. The reult reveal that the goal of the monopolitic channel provier i to maximize her profit therefore, ome avertier cannot benefit from the high CTR becaue the price of iplay avertiing i higher than their willingne-to-pay. 5. Invetment of contextual earch an multimeia technologie m W + In thi ection, we icu the cae where the impreion effect of iplay avertiing an the click-thru rate of contextual avertiing can be ajute by channel provier. Since the impreion benefit of iplay avertiing i relate to the multimeia effect of avertiing, an meanwhile, the click-thru rate of contextual avertiing i aociate with the quality of contextual earch, the cot of proucing multimeia avertiing an the cot of improving the quality of earch engine can be aume to be c ¼ cb an K ¼ lc, repectively. Conequently, the channel provier may charge a higher price ue to their better ability to enhance a viitor impreion or match Web content to a however, the increaing marginal cot become an obtacle to their profitability. Therefore, we firt conier that there i a monopolitic channel provier offering mixe avertiing in a market. The channel provier can ecie the impreion benefit an click-thru rate before etermining the price of her a ervice. In other wor, the optimal pening on multimeia technology an earch engine are the olution to the following contraine maximization problem c π CTR Fig.. Optimal profit (monopoly veru uopoly). Max b c p m ¼ Cg 0 w g 0 þ ððw XÞþw g 0 þðk CÞÞ c 4ððW XÞ=g 0 þw þw Þ c ðw XÞþw g 0 ðk CÞ c ððw XÞ=g 0 þw þw Þ K t b > c b > ðe þ kþa an ea > w g 0 ð51þ In thi mathematical program, all contraint ha been mentione an icue in Section 4. For example, ea >w g 0 i to guarantee

9 4 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) 16 7 Fig. 4. The Monopolitic channel provier profit (3D graph). Fig. 6. The bet-repone function in the uopoly market. that the earch engine can erve all avertier in the market, wherea b >(e + k)a i to highlight the importance of bran builing. Moreover, in orer to gain poitive profit from iplay avertiing, the unit prouction cot of iplay avertiing houl be le than the impreion benefit erive from carrying a iplay a. Here, becaue the cloe form of analytic olution i ifficult to hanle, we ue a numerical example[8] to oberve the channel provier behavior in the monopolitic etting, a hown in Fig. 4. The optimal olution i given by ðb c Þ¼ð Þ, a hown in Fig. 5. Subequently, we introuce a ynamic moel of uopoly in which the channel offering iplay avertiing i till terme a channel 1 an the other a channel. The timing of the game i a follow (1) Channel provier 1 an channel provier can ecie the impreion benefit of iplay avertiing an the clickthru rate of contextual avertiing, repectively. () The channel provier oberve b an c. (3) Then, both channel provier chooe repective a price. Since the econ perio-profit function are known in Section 4, channel 1 bet repone function i given by olving the optimization problem a follow Max pi c ðb c Þ¼ððW XÞ ðk CÞþðw þ w Þg 0 c Þ b 9ððW XÞ=g 0 ð5þ t b > c b > ðe þ kþa Similarly, channel bet repone function i given by olving the optimization problem a follow p c ðb c Þ¼ððW XÞþðK CÞþðw þw Þg 0 þc Þ 9ððW XÞ=g 0 þw þw Þ K Max c t ea > w g 0 ð53þ For the ame reaon a the above monopolitic cae, we ue a numerical example to illutrate the firt perio-nah equilibrium of the ynamic moel. Given the ame parameter a in Fig. 4, the numerical reult of each channel bet repone i hown in Fig. 6, where ðb c Þ¼ð Þ. From Fig. 6, we fin that both channel provier ten to gain more profit by ecreaing their effort on multimeia technology an the quality of contextual earch. Comparing thee two cenario, we fin that the amount of invetment in multimeia technology in the uopoly market i higher than that in the monopolitic etting. Furthermore, we fin that the channel provier in the monopolitic etting woul reuce expene on multimeia technology an concentrate on the quality of earch engine. In aition, in a uopolitic market, the channel offering contextual avertiing woul provie the lowet quality earch engine to erve it avertier. That i, in a uopolitic market, the value of contextual avertiing cannot truly be reveale ue to price competition. Therefore, thee numerical reult may he light on why acquiition i intenive among thee channel offering contextual avertiing in the real worl. 6. Summary an Dicuion Fig. 5. The Monopolitic channel provier profit (contour). In a uopolitic market, contextual avertiing become an innovative mean to create another income tream for channel provier taking avantage of earch engine to penetrate the Web avertiing market which i hanle by a few large-cale channel offering iplay avertiing. On the other han, in a monopolitic etting, contextual avertiing can be treate a a vertical prouct ifferentiation trategy with which to acquire enormou profit. Our major premie wa that there exit ome avertier in the market who conier that bran builing i more important than elivering viitor to appointe webite. In ai-

10 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) tion, the channel provier offering contextual avertiing ha the ability to erve all avertier in the market. Conequently, we give the caue an effect for each quetion propoe in Introuction a follow Summary of Fining & Managerial Implication Quetion 1 Coul the higher quality of a earch engine boot the profit of the channel provier offering contextual a? Moreover, uner competition, what are the conition that woul lea to the increae (ecreae) of the channel provier profit? In a uopolitic market, the anwer i poitive only if the impreion effect generate by iplay avertiing i not ueful. Moreover, we fin that the profitability of each channel in a uopolitic market may increae with the channel marketing power an waiting time. A long a impreion benefit generate by iplay avertiing i ufficient, the profitability of each channel provier in a uopolitic market may increae when any channel provier waiting cot become higher (i.e., increaing elay time for an expoure chance). Actually, increaing ervice quality can improve profitability in a monopolitic etting however, thi reult in a competitive etting how a contraictory outcome. The reaon for thi counterintuitive reult i a follow. In the competitive etting, each channel provier pricing eciion i conitional on the other channel provier. If one channel can reuce it ervice rate, then the other woul boot a price in repone. Thu, although increaing waiting time may mean loing ome cutomer, the channel can compenate for it lo by booting the a price ue to it competitor repone. A a conequence, equilibrium profit of both channel may increae. Quetion What i the ufficient conition for enuring that a market become efficient? I a earch engine company joining the avertiing market ocially beneficial from the view point of market efficiency (ocial welfare)? We ugget that the click-thru rate of iplay avertiing can be ue a the conition. When the click-thru rate of iplay avertiing i low, a monopoly i more efficient than competition. However, when the click-thru rate of iplay avertiing i high, the oppoite hol true. Therefore, if tatitical ata how that the click-thru rate of iplay avertiing i at a higher level, a earch engine company joining the avertiing market will be beneficial to ociety. However, if both channel are merge, the monopolitic channel provier woul carify ome avertier benefit an enforce them to purchae contextual avertiing by raiing the price of iplay a. Therefore, the government houl reject the eal becaue the acquiition woul lea to an inefficient Web avertiement market an avertier woul become the loer in the market. Quetion 3 It i coniere that contextual text link lack the impreion effect therefore, o the quite high quality iplay a threaten the profit gaine by contextual a? Our reult how a contraictive reult in a uopolitic market. The reaon for thi reult i a follow (1) one channel provier woul raie it a price when the other channel provier oe the ame () the target conumer of contextual avertiing involve top-level avertier who have higher valuation on bran builing in the market an thoe buyer are willing to pay more for a better iplay a. Therefore, the price of contextual avertiing may follow the price of iplay avertiing, which increae conierably uch that both channel provier coul make more profit. In aition, we invetigate how channel provier control pening on multimeia technology applie to iplay a an the click-thru rate of contextual a to maximize their profit. The monopolitic channel provier woul boot the click-thru rate an reuce her invetment on multimeia technology. On the contrary, in a uopolitic market, the channel provier offering contextual a ha no incentive to improve the click-thru rate, wherea the channel provier offering iplay a woul pen much more capital than woul the monopolitic channel provier on multimeia technology. Thi reveal that the actual trength of earch engine cannot be utilize in the uopolitic market therefore, it i likely to be one of the mot important motivation why Google acquire DoubleClick. By contructing the framework that relate caue an effect in the online avertiing market, the impact of thi tuy to each takeholer in Fig. 1 i given a follow Channel In a monopolitic market, both tronger bran power an higher ervice rate have a poitive effect on revenue. In a uopolitic market, becaue higher bran power i helpful to the revenue of channel, they houl enhance their bran power a more a poible. Meanwhile, becaue reucing waiting time may negatively affect their profitability, they houl keep their ervice rate at an appropriate level. Comparing both online avertiing market tructure, we fin that the amount of invetment in multimeia technology in the uopolitic market i higher than that in the monopolitic etting. Furthermore, we fin that the channel provier in the monopolitic etting invet more on the quality of contextual earch. On the contrary, in a uopolitic market, the contextual avertiing channel ha no incentive to raie the quality of contextual earch. Therefore, for the contextual avertiing channel in the uopolitic market, becaue it profit cannot be enhance by improving the click-thru rate, we ugget that the channel provier houl conier buying her major competitor in orer to utilize avantage of earch engine. For the iplay averting channel in the uopolitic market, it can afely evelop better multimeia a becaue thi action lea to a win-win reult Avertier For mall avertier, the exitence of contextual avertiing offer them a channel to carry Web avertiing for the firt time. Our reult how that mall avertier with lower braning power woul prefer contextual a than iplay a, wherea top avertier with tronger braning power woul prefer iplay a than contextual a. In aition, accoring to the analyi of market efficiency, a monopolitic a channel woul carify ome avertier benefit by raiing the price of iplay a. Therefore, if the clickthru rate of iplay avertiing i at a higher level, it i better for them to block two competing a channel merge. Meanwhile, the government alo houl attach great importance to the iue Publiher In general, contextual avertiing an iplay avertiing are the major ource of revenue for mall publiher an top publiher, repectively. Becaue channel provier can tranfer avertiing fee pai by avertier to publiher with a committe ratio, the impact of thi tuy on publiher i a follow. Firt, if the revenue of publiher i poitively aociate with the profit of channel, uch a ome kin of revenue haring, the revenue gaine from contextual a in the monopolitic etting i higher than that in the uopolitic market. On the other han, if the click thru rate of iplay a i ufficiently low, the revenue gaine from iplay a in the monopolitic etting i lower than that in the uopolitic market. If the click thru rate of iplay a i ufficiently high, the oppoite hol true. Secon, if the revenue of publiher i poitively aociate with market hare of channel, the revenue graine from contextual a in the monopolitic etting i higher than that in a uopolitic market, wherea the revenue graine from iplay a in the monopolitic etting i lower than that in the uopolitic market.

11 6 Y.-M. Li, J.-H. Jhang-Li / Electronic Commerce Reearch an Application 8 (009) Viitor Becaue viitor woul receive more ueful information from contextual a when the quality of contextual earch increae an ee more entertaining content from iplay a when the multimeia effect become tronger, IT invetment on contextual earch an multimeia technology woul affect viitor eeply in the tuy. Therefore, becaue the quality of contextual earch in the monopolitic etting i better than that in the uopolitic market, viitor woul ee more ueful contextual a which fit the content they are intereting in viewing when both channel are merge. On the other han, becaue the invetment in multimeia effect in the uopolitic market i higher than that in the monopolitic etting, viitor woul ee more animate banner a when both channel coexit in the online avertiing market. 6.. Limitation an irection for future tuy Amittely, the trategy, reucing ervice capacity in the uopolitic market, may boot both channel provier profit in a hort run. However, from the long-term viewpoint, the expecte elay time to be electe houl be reuce, uch that current avertier can be erve expeitiouly thu, oncoming avertier may conier placing their orer for the a ervice ue to efficient ervice rate. Since increaing ervice capacity lea to price war an alo appeal to propective avertier, the quetion of optimal elay time remain to be olve. Furthermore, for facilitating mathematical analyi, an avertier utility an the cot of elay time are linear in thi paper. Inee, a nonlinear utility function (the cot of elay time) work well conceptually however, it woul lea to no cloe form of market hare in our moel. Therefore, we acrifice a little reality of the moel in orer to erive more managerial inight from analytic olution. Actually, our reearch blueprint i a naphot of online avertiing market an all our fining are bae on the tatic moel however, it till provie ifferent imenion an viewpoint to unertan the core quetion of online avertiing market. Beie, mot channel provier offering contextual avertiing coul manipulate a tarting price that erve a the lowet allowable bi an the minimum payment for one-click. In thi reearch we aume that each avertier exploiting contextual avertiing pay the ame price. Therefore, if each avertier bi bae on her buget an iniviual valuation, thi quetion will relate to auction mechanim. Therefore, we believe that thi reearch can further grow in everal way an erve a a bai for future reearch Note 1. An example can be foun by viiting the following web page http// ea > w g 0 i enough for the equilibrium however, the light change, i.e., ea >w g 0, can make u verify inequalitie eaily. 3. Becaue of ðop c =ow Þ¼ðW XÞþw g 0 ðk CÞ c, ðop c =ow Þ i alway larger than zero when (W X) (K C) c P 0 hol. However, when (W X) (K C) c < 0 hol, ðop c =ow Þ < 0 i poible. op 4. c ob ¼ðW XÞþw g 0 ðk CÞ c 5. Solving C þ W ~ h w g p pure ¼ 0 yiel ~ h ¼ w g 0 þp pure C Wþw g After olving Max p pure p pure ¼ðp pure c Þð1 ~ hþg 0, we coul erive p pure an p pure by uitable ifferentiation an ubtitution. 7. The parameter are given by k = 0.01, e = 0, a = 30, a = 0w = w = 0.0, g 0 = 500, b = 400, an c =5. 8. The parameter are given by K ¼ c, w ¼ 0005=c, c ¼ 00005b, a = 30, a = 0, e = 0, k = 0.01, g 0 = 500, c = 0., an w = 0.0. Appenix A. Proof of Propoition 1 By firt-orer conition, we can erive the bet-repone function of thee two a ervice, which are given by p c ðpc Þ¼pc þðw XÞþw g 0 ðk CÞþc ¼ w g 0 þðk CÞþp c an p c ðpc Þ Solving both equation imultaneouly, we have Nah equilibrium p c an pc thu, the eman function an the profit function can be olve by plugging p c an pc into g, g, p c, an pc. Appenix B. Proof of Propoition By firt-orer conition, the optimality conition of the maximization problem are given by ðop m =op mþ 6 0 an ðopm =op m Þ 6 0. Obviouly, thee two equation cannot be olve imultaneouly becaue no uch D p can atify thi ytem. Notice that p m ¼ K w g i the maximal price for contextual avertiing. However, for any interior olution (i.e., p m < K w g ), there exit ome feaible irection uch that T rf ðp m pm Þ > 0, which implie that the relative maximal point oe not locate in the inie region in other wor, we only conier the bounary cae. Plugging p m ¼ K w g intog, the relationhip between p m an gm i given by g mððw XÞ=g 0 þ w ÞþC w g 0 ¼ p m, an then the problem can be rewritten a follow Max p m ¼ðg mððw g XÞ=g 0 þ w ÞþC w g 0 c Þðg 0 g m Þ þða w g m Þgm t g m 6 g 0 Thu, all relate analytic reult can be erive by uitable ifferentiation an ubtitution. 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