UCL School of Management is delighted to welcome Carl Mela, Duke University, to host a research seminar discussing ‘Online marketplace advertising.’
This paper considers the allocation of “shelf space” in the context of online marketplaces, where items’ positions are linked to advertising. While featuring advertised products makes search less ecient, lowering transaction commissions, it incentivizes sellers to compete for better placements via advertising. We consider this trade-off by modeling both sides of the platform. On the demand side, we develop a joint model of search (impressions), consideration (clicks), and choice (demand). On the supply side, we consider sellers’ advertising competition under various fee structures and ranking algorithms. Using buyer, seller, and platform data from an online marketplace specializing in handmade goods, we nd that sorting goods by consumer preferences decreases platform profits, as it leads to more lower price item purchases. On the seller side, the high advertising commissions create an incentive for sellers to advertise items in the hope of selling them elsewhere with lower fees. Reflecting this hope, there is a negative valuation from demand for the sellers who advertise, whereas the median valuation for consideration is estimated to be $0:13. We find that both the platform and its sellers are better off when the platform lowers the cost-per-action (CPA) and instead increases the cost-per-consideration/click (CPC).