Download Online Marketplace Advertising

Online Marketplace Advertising
Hana Choi & Carl F. Mela
Fuqua School of Business, Duke University
This paper considers the allocation of “shelf space” in the context of online marketplaces, where items'
listing positions are linked to advertising. While featuring advertised products makes search less efficient,
lowering sales and transaction commissions, it also incentivizes sellers to compete for better placements
via increased advertising spend. We consider this trade-off by modeling both sides of the marketplace
platform. On the demand side, we develop a joint model of search (impression), consideration (click),
choice (demand). On the supply side we consider sellers' advertising competition in the face of various
advertising fee structures.
Using data from an online marketplace specializing in handmade goods, we find consumer heterogeneity
in search and consideration to be substantial. On the seller side, we find the high commissions currently
charged for advertising leads to a negative valuation from demand for the sellers who advertise. However,
the median valuation for consideration (click) is estimated to be $0.25. Thus, the platform and its
advertisers are better off when the platform lowers the commissions and instead increases the cost-perconsideration/click.