Impact of OTA Bias and Consolidation on Consumers

Online travel agencies (“OTAs,” such as Expedia and Priceline) charge hotels fees that can reach 25% or even more. In today’s post, I assess the causes of these fees as well as the tactics OTAs have used to punish hotels that object — penalizing hotels that discount through other channels, while simultaneously boosting those that agree to pay more. With Expedia and Priceline (including the many other companies they have acquired) jointly controlling 95% of the OTA market, competitive forces impose limited discipline on OTA practices.

My bottom line: OTA practices drive up costs to both hotels and consumers. At the very least, OTAs need improved disclosure of both bias and advertising. Meanwhile, it’s hard to defend OTAs’ efforts to punish hotels that sought cheaper distribution elsewhere. The time is right for the FTC and state attorneys general to examine this market.

My full article:

Impact of OTA Bias and Consolidation on Consumers

Design of Search Engine Services: Channel Interdependence in Search Engine Results

Edelman, Benjamin, and Zhenyu Lai. “Design of Search Engine Services: Channel Interdependence in Search Engine Results.” Journal of Marketing Research (JMR) 53, no. 6 (December 2016): 881-900. (First posted April 2013.)

The authors examine prominent placement of search engines’ own services and effects on users’ choices. Evaluating a natural experiment in which different results were shown to users who performed similar searches, they find that Google’s prominent placement of its Flight Search service increased the clicks on paid advertising listings by more than half while decreasing the clicks on organic search listings by about the same quantity. This effect appears to result from interactions between the design of search results and users’ decisions about where and how to focus their attention: users who decide what to click based on listings’ relevance became more likely to select paid listings, while users who are influenced by listings’ visual presentation and page position became more likely to click on Google’s own Flight Search listing. The authors consider implications of these findings for competition policy and for online marketing strategies.

To Groupon or Not to Groupon: The Profitability of Deep Discounts

Edelman, Benjamin, Sonia Jaffe, and Scott Duke Kominers. “To Groupon or Not to Groupon: The Profitability of Deep Discounts.” Marketing Letters 27, no. 1 (March 2016): 39-53. (First circulated in June 2011. Featured in Working Knowledge: Is Groupon Good for Retailers? Excerpted in HBR Blogs: To Groupon or Not To Groupon: New Research on Voucher Profitability.)

We examine the profitability and implications of online discount vouchers, a relatively new marketing tool that offers consumers large discounts when they prepay for participating firms’ goods and services. Within a model of repeat experience good purchase, we examine two mechanisms by which a discount voucher service can benefit affiliated firms: price discrimination and advertising. For vouchers to provide successful price discrimination, the valuations of consumers who have access to vouchers must generally be lower than those of consumers who do not have access to vouchers. Offering vouchers tends to be more profitable for firms which are patient or relatively unknown, and for firms with low marginal costs. Extensions to our model accommodate the possibilities of multiple voucher purchases and firm price re-optimization. Despite the potential benefits of online discount vouchers to certain firms in certain circumstances, our analysis reveals the narrow conditions in which vouchers are likely to increase firm profits.

The Design of Online Advertising Markets

Edelman, Benjamin. “The Design of Online Advertising Markets.” Chap. 15 in The Handbook of Market Design, edited by Nir Vulkan, Alvin E. Roth, and Zvika Neeman. Oxford University Press, 2013.

Because the market for online advertising is both new and fast-changing, participants experiment with all manner of variations. Should an advertiser’s payment reflect the number of times an ad was shown, the number of times it was clicked, the number of sales that resulted, or the dollar value of those sales? Should ads be text, images, video, or something else entirely? Should measurement be performed by an ad network, an advertiser, or some intermediary? Market participants have chosen all these options at various points, and prevailing views have changed repeatedly. Online advertising therefore presents a natural environment in which to evaluate alternatives for these and other design choices. In this piece, I review the basics of online advertising, then turn to design decisions as to ad pricing, measurement, incentives, and fraud.

Reinventing Retail: ShopRunner’s Network Bet (teaching materials) with Karen Webster

Edelman, Benjamin, and Karen Webster. “Reinventing Retail: ShopRunner’s Network Bet.” Harvard Business School Case 915-002, August 2014. (Revised March 2015.) (educator access at HBP. request a courtesy copy.)

ShopRunner considers adjustments to improve its online shopping service which offers no-charge two-day shipping as well as easy returns and other conveniences. Competitors’ diverse pricing models and ancillary benefits raise questions about how to structure and price ShopRunner’s offering. Meanwhile, an investment from Alibaba presents new opportunities in China but risks distraction from the core business.

Teaching Materials:

Reinventing Retail: ShopRunner’s Network Bet – Teaching Note (HBP 915023)

Risk, Information, and Incentives in Online Affiliate Marketing

Edelman, Benjamin, and Wesley Brandi. “Risk, Information, and Incentives in Online Affiliate Marketing.” Journal of Marketing Research (JMR) 52, no. 1 (February 2015): 1-12. (Lead Article.)

We examine online affiliate marketing programs in which merchants oversee thousands of affiliates they have never met. Some merchants hire outside specialists to set and enforce policies for affiliates, while other merchants ask their ordinary marketing staff to perform these functions. For clear violations of applicable rules, we find that outside specialists are most effective at excluding the responsible affiliates, which we interpret as a benefit of specialization. However, in-house staff are more successful at identifying and excluding affiliates whose practices are viewed as “borderline” (albeit still contrary to merchants’ interests), foregoing the efficiencies of specialization in favor of the better incentives of a company’s staff. We consider the implications for marketing of online affiliate programs and for online marketing more generally.

Accountable? The Problems and Solutions of Online Ad Optimization

Edelman, Benjamin. “Accountable? The Problems and Solutions of Online Ad Optimization.” IEEE Security & Privacy 12, no. 6 (November-December 2014): 102-107.

Online advertising might seem to be the most measurable form of marketing ever invented. Comprehensive records can track who clicked what ad–and often who saw what ad–to compare those clicks with users’ subsequent purchases. Ever-cheaper IT makes this tracking cost-effective and routine. In addition, a web of interlocking ad networks trades inventory and offers to show the right ad to the right person at the right time. It could be a marketer’s dream. However, these benefits are at most partially realized. The same institutions and practices that facilitate efficient ad placement can also facilitate fraud. The networks that should be serving advertisers have decidedly mixed incentives, such as cost savings from cutting corners, constrained in part by long-run reputation concerns, but only if advertisers ultimately figure out when they’re getting a bad deal. Legal, administrative, and logistical factors make it difficult to sue even the worst offenders. And sometimes an advertiser’s own staff members prefer to look the other way. The result is an advertising system in which a certain amount of waste and fraud has become the norm, despite the system’s fundamental capability to offer unprecedented accountability.

Pivots and Incentives at LevelUp (teaching materials) with Karen Webster

Edelman, Benjamin, and Karen Webster. “Pivots and Incentives at LevelUp.” Harvard Business School Case 915-001, August 2014. (Revised March 2015.) (educator access at HBP. request courtesy copy.)

LevelUp’s mobile payments service lets users scan a smartphone barcode rather than swipe a credit card. Will consumers embrace the service? Will merchants? LevelUp considers adjustments to make the service attractive to both consumers and merchants, while trying to accelerate deployment at reasonable cost.

Teaching Materials:

Pivots and Incentives at LevelUp – Teaching Note (HBP 915015)

Optimization and Expansion at OpenTable (teaching materials) with Karen Webster

Edelman, Benjamin, and Karen Webster. “Optimization and Expansion at OpenTable.” Harvard Business School Case 915-003, August 2014. (Revised March 2015.) (educator access at HBP. request courtesy copy.)

OpenTable considers adjustments to increase its benefits to merchants, including a novel payments service that lets customers skip the multi-step process of using a credit card.


Optimization and Expansion at OpenTable – PowerPoint Supplement (HBP 910010)

Teaching Materials:

Optimization and Expansion at OpenTable – Teaching Note (HBP 915013)

Pitfalls and Fraud in Online Advertising Metrics: What Makes Advertisers Vulnerable to Cheaters, and How They Can Protect Themselves

Edelman, Benjamin. “Pitfalls and Fraud in Online Advertising Metrics: What Makes Advertisers Vulnerable to Cheaters, and How They Can Protect Themselves.” Journal of Advertising Research 54, no. 2 (June 2014): 127-132.

How does online advertising become less effective than advertisers expect and less effective than measurements indicate? The current research explores problems that result, in part, from malfeasance by outside perpetrators who overstate their efforts to increase their measured performance. In parallel, similar vulnerabilities result from mistaken analysis of cause and effect–errors that have become more fundamental as advertisers target their advertisements with greater precision. In the paper that follows, the author attempts to identify the circumstances that make advertisers most vulnerable, notes adjusted contract structures that offer some protections, and explores the origins of the problems in participants’ incentives and in legal rules.