Affiliation:
1. Israel Institute of Technology, Haifa
2. University of California, Davis
Abstract
Affiliate programs offer affiliates referral fees in return for directing potential customers into a merchant's Web site. Affiliates are commonly paid based on the number of leads converted by the merchant into customers (pay-per-conversion) or based on the number of leads referred to the merchant (pay-per-lead). Given the prevalence of both, interesting questions for research are as follows: Why do both formats prevail? Under what conditions is one format preferred over the other? The authors find that pay-per-lead is more profitable when a merchant negotiates a separate deal with an affiliate. In this case, pay-per-conversion is not optimal for the affiliation alliance because it leads to suboptimal pricing by the merchant. In contrast, pay-per-lead is less profitable than pay-per-conversion for a merchant that works with a large number of affiliates all under the same terms because it is susceptible to bogus referrals that cannot be converted into customers.
Subject
Organizational Behavior and Human Resource Management,Sociology and Political Science,Information Systems
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