Economic Analysis of Reward Advertising

Abstract

This paper investigates an emerging monetization mechanism for app developers – reward advertising. With reward ads, consumers have an option to view ads in exchange for a reward such as premium content. We investigate when and how an app developer should adopt reward ads as a mechanism for monetizing content. We identify two determinants – the revenue rate of the ads and the heterogeneity of consumers’ nuisance costs of viewing ads. When the ad revenue rate is low relative to consumers’ nuisance cost, the app developer should rely on content selling and not offer reward ads (i.e., the pure content-selling strategy). Otherwise, it is profitable for the app developer to offer reward ads alone (the pure reward-advertising strategy) or in combination with content selling (the hybrid strategy). When reward ads are offered, the hybrid strategy is more profitable if consumers are highly heterogeneous in nuisance costs; otherwise, the pure reward-advertising strategy is more profitable. Interestingly, we find that a high reward rate could decrease the number of reward ads viewed due to accelerated satiation. The optimal reward rate for the pure reward-advertising strategy may increase or decrease in consumers’ nuisance cost heterogeneity. Furthermore, when the proportion of low-nuisance-cost consumers is high enough, the total consumer surplus under the pure reward-advertising strategy is lower than those under the other two strategies. Our results provide practical guidance for app developers on when to use reward advertising, how to choose optimal rewards rates, and what to expect about its impact on consumers.