Economic Analysis of Reward Advertising

Hong Guo, Xuying Zhao, Lin Hao, De Liu

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

Reward advertising is an emerging monetization mechanism for app developers in which consumers choose to view ads in exchange for apps’ premium content. We provide the first economic analysis of reward advertising by studying the implications of offering reward ads, either by itself, or in conjunction with direct selling of premium content. We find that the condition for offering reward ads is surprisingly simple, and it is often optimal to offer reward ads jointly with direct selling of premium content. Interestingly, a high reward rate could decrease the number of reward ads viewed because of accelerated satiation for premium content; thus, developers need to balance the need to incentivize ad viewing and to prevent excessive accelerated satiation. The need for limiting the number of reward ads per consumer only arises when the marginal revenue of reward ads diminishes quickly. Such limit is only effective when the base ad revenue rate is not too high and when ad viewers have relatively homogenous nuisance costs. Finally, reward ads may increase or decrease consumer surplus.

Original languageEnglish (US)
Pages (from-to)2413-2430
Number of pages18
JournalProduction and Operations Management
Volume28
Issue number10
DOIs
StatePublished - Oct 1 2019

Bibliographical note

Funding Information:
We thank the department editor, Dr. Subodha Kumar, the anonymous senior editor, and the three anonymous reviewers for very constructive comments. We also thank seminar participants at Chong Qing University, Production and Operations Management Society Annual Conference, Smart Data Pricing Workshop, University of Illinois at Chicago, and Workshop on Information Systems and Economics for useful comments. Dr. De Liu received support for this research from National Science Foundation of China under grant no. 71571044.

Keywords

  • apps
  • consumer surplus
  • monetization
  • premium content
  • reward advertising

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