Integrating the mechanism of three-part tariff pricing to the provision of intra-site search engine advertising services

Intra-site search engines (ISEs) dedicated to private electronic markets have become popular with the fast-growing electronic markets. Among several research facets regarding the advertising services of ISEs, we focus on how to optimise the ISE-based advertising market mechanism by improving the pricing model. The widely adopted pricing scheme, Flat Fee (FF), fails to differentiate ISE advertising services among subscribers. Such inefficiency results in the loss of the subscribers and the decline of the provider’s revenue. We design an advanced pricing scheme, three-part tariff pricing with performance relevant adjustments (3PT+), implemented by a two-period contract, to match the differentiated ISE service consumption among subscribers. The mathematical analyses of the advertiser’s VaR model and ISE provider’s revenue optimisation model show that the 3PT+ pricing scheme is superior to the FF pricing scheme as the former can attract more advertisers and retain most of them in the ISE services. The experimental results from the Monte Carlo simulation further support the theoretic derivation.