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Incentive contract design for internet referral services: cost per click vs cost per sale

Incentive contract design for internet referral services: cost per click vs cost per sale Internet referral services are a common form of online marketing operating activities. To incentivize infomediaries and improve referral performance, brand retailers typically apply the cost-per-click (CPC) or the cost-per-sale (CPS) payments. The purpose of this paper is to investigate the effect of referral services on the optimal contract with CPC or CPS payments.Design/methodology/approachThis paper studies a mechanism design problem for internet referral services. To maximize the expected utility of the brand retailer, an uncertain contract model is established in which the brand retailer's assessment of the infomediary's referral service capability is characterized as an uncertain variable. Then equivalent models under CPC and CPS payments are presented to obtain the optimal solutions.FindingsThe results demonstrate that under CPC payments, as the referral service capability increases, the optimal sales volume is increasing, and the optimal transfer payment first shows a declining and then a rising trend. The brand retailer is less likely to raise the optimal transfer payment for the infomediary given a higher CPC revenue-sharing fee percentage, which is counterintuitive. Under CPS payments, the optimal sales volume and transfer payment are also increasing in the referral service capability. In addition, an increase in the click-through rate leads to the infomediary's incremental marginal utility.Originality/valueThe value of this research is its application of incentive contracts to the internet referral services considering CPC or CPS payments. The results of this research can serve as a guide for retailers and infomediaries in their decision-making around online retailing. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Kybernetes Emerald Publishing

Incentive contract design for internet referral services: cost per click vs cost per sale

Zhou, Chi; Xu, Geni; Liu, Zhibing
Kybernetes , Volume 49 (2): 26 – Jan 23, 2020
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References (42)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0368-492X
DOI
10.1108/k-07-2018-0371
Publisher site
See Article on Publisher Site

Abstract

Internet referral services are a common form of online marketing operating activities. To incentivize infomediaries and improve referral performance, brand retailers typically apply the cost-per-click (CPC) or the cost-per-sale (CPS) payments. The purpose of this paper is to investigate the effect of referral services on the optimal contract with CPC or CPS payments.Design/methodology/approachThis paper studies a mechanism design problem for internet referral services. To maximize the expected utility of the brand retailer, an uncertain contract model is established in which the brand retailer's assessment of the infomediary's referral service capability is characterized as an uncertain variable. Then equivalent models under CPC and CPS payments are presented to obtain the optimal solutions.FindingsThe results demonstrate that under CPC payments, as the referral service capability increases, the optimal sales volume is increasing, and the optimal transfer payment first shows a declining and then a rising trend. The brand retailer is less likely to raise the optimal transfer payment for the infomediary given a higher CPC revenue-sharing fee percentage, which is counterintuitive. Under CPS payments, the optimal sales volume and transfer payment are also increasing in the referral service capability. In addition, an increase in the click-through rate leads to the infomediary's incremental marginal utility.Originality/valueThe value of this research is its application of incentive contracts to the internet referral services considering CPC or CPS payments. The results of this research can serve as a guide for retailers and infomediaries in their decision-making around online retailing.

Journal

Kybernetes – Emerald Publishing

Published: Jan 23, 2020

Keywords: Information asymmetry; Contract theory; Cost per click; Cost per sale; Internet referral services; Uncertainty theory

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