Smart Pricing may increase average publisher revenue

Online publisher networks, such as Google’s AdSense or the Yahoo! Publisher Network, enable advertisers to simultaneously contest click auctions for thousands - even millions - of web publisher ad slots, all with a single max CPC bid. Recognizing that different publishers deliver disparate performance for advertisers, some networks feature automated systems to help advertisers bid more efficiently with that single bid - effectively discounting click prices on publishers according to the relative value of clicks on each publisher’s ad slots. Google, for example, applies Smart Pricing (SP) for this purpose to appropriately discount advertiser bids on the Google Display Network. 

It is widely accepted that a well-executed system like SP enhances advertiser value. Whether SP also improves network revenue - and hence, via publisher revenue sharing agreements - average publisher revenue, remains a matter of some dispute. While it is clear that higher performing publishers will do better than lower performing publishers, opinion is divided as to whether publishers are on average better or worse off with SP.

Skepticism is understandable - the system by its very nature entails discounting advertiser bids. But if advertisers indeed get more value from a smart-priced network then we would expect them to bid higher because of that feature. The key question is whether the network revenue produced by their SP-discounted higher bids is more, less, or the same as the revenue produced by their undiscounted regular bids. In other words, does Smart Pricing grow the revenue pie?

In this paper, I develop a simple and tractable model of an auction-based publisher click network, replete with an idealized version of SP and profit-maximizing advertisers, and use it to derive insights into the revenue effects of systems like SP. While there is no claim here with regard to the revenue impact of SP-like systems on any actual publisher network, it is hoped that the arguments in the paper will help guide intuition and shape realistic expectations for publishers. And the main implication of this analysis is good news for networks and publishers alike - under reasonable conditions Smart Pricing, and its non-Google analogs, can significantly grow the pie.