Abstract:

The problem of online advertising pricing is studied based on a differential game consisting of a retailer and an advertiser. In this differential game, the retailer controls the price of a product, and advertiser sets the level of effort to run a website. The price of advertisement is negotiated by both of them. First, we give the equilibrium strategies of the retailer and the advertiser under a given advertising price by the differential game theory. Then the pricing policy of advertising is obtained by Nash bargaining for the retailer with different negotiating abilities. The results show that: 1) The level of effort to operate the website is positively correlated with the advertising price; 2) The optimal ad-price is negatively correlated with the retailer’s negotiating ability; 3) The retailer’s profit is increasing with his bargaining power while decreasing with the decay rate of the goodwill. However, the profit of the advertiser is decreasing with the bargaining power of the retailer and the decay rate of clicks.

Key words: clicks, goodwill, differential game, ad-pricing