Platform advertising and targeted promotion: Paid or free?

Abstract

Platform advertising has been valued by e-commerce platforms because of its role in demand creation and market expansion. Moreover, in order to improve advertising efficiency, e-commerce platforms make targeted promotion efforts. This paper studies a supply chain consisting of a seller and an agent sales platform, where the product is sold by the seller’s offline channel or the platform. The platform provides two advertising modes (paid advertising and free advertising) and decides whether to conduct targeted promotion. The seller can choose the types of platforms to register on. Firstly, the findings show that, compared to free advertising, paid advertising can always generate more profits for the platform but might also benefit the seller simultaneously when the commission rate or cost coefficient of targeted promotion is low. Secondly, we find that targeted promotion can improve the profits of both the seller and the platform, encourage the seller to register on the platform that provides paid advertising, and promote the cost-sharing of advertising between the seller and the platform. Finally, we derive that, when sharing targeted promotion costs, the endogenous sharing proportion will hurt the seller, while the exogenous sharing proportion may benefit both the platform and the seller.