Production and Operations Management

Economic Analysis of Reward Advertising

Journal Article

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.

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