Copyright © 2008 by Benjamin Edelman and Hoan Soo Lee
Working papers are in draft form. This working paper is distributed for purposes of comment and
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CPC/CPA Hybrid Bidding in
a Second Price Auction
Benjamin Edelman
Hoan Soo Lee
Working Paper
09-074
CPC/CPA Hybrid Bidding in
a Second Price Auction
Benjamin Edelman and Hoan Soo Lee
Harvard Business School
December 17, 2008
We develop a model of online advertising in which each advertiser chooses from multiple advertising
measurement metrics – paying either for each click on its ads (CPC), or for each purchase that follows an ad‐click
(CPA). Our analysis extends classic auction results by allowing players to make bids using two different pricing
schemes, while the driving information for bidders’ endogenous selection – the conversion rate – is hidden from
the seller. We show that the advertisers with the most productive sites prefer to pay CPC, while advertisers with
lower quality sites prefer to pay CPA – a result that may be viewed as counterintuitive since low quality sites
cannot proudly tout their conversion rates. This result holds even if an ad platform’s assessment of site quality is
correct in expectation. We also show that by offering both CPC and CPA, an ad platform can weakly increase its
revenues compared to offering either alternative alone.
1
Motivation
Modern online advertising platforms typically offer advertisers a variety of metrics to measure and pay for
advertising deliveries. For example, advertisers may pay per impression (CPM), per click (CPC), per action (CPA), or
in proportion of the dollar value of merchandise sold (ad valorem).
When advertisers and ad platforms evaluate payment metrics, it seems they currently consider effects on parties’
incentives. For example, if an advertiser is paying per impression, an ad pla