Pricing of Online Advertising: Cost-Per-Click-Through Vs. Cost-Per-Action

Today's online advertising contracts tie online advertising payments directly to campaign measurement data such as click-throughs and purchases. This paper applies the economic theory of incentive contracts to the study of these pricing models and provides potential explanations as to when and how CPC (cost-per-click-through) and CPA (cost-per-action) pricing models should be used. We argue that using CPC and CPA models appropriately can give both the publisher and the advertiser proper incentives to make non-contractible efforts that may improve the effectiveness of advertising campaigns. It also allows the publisher and the advertiser to share the risk caused by uncertainty in the product market. Our research discovers various factors that can influence the usage of CPC and CPA models.