Operations of online advertising and publisher's options
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The purpose of this master's thesis is to develop a new revenue model for the online advertising industry with a specific focus on the impact of uncertain demand and a way to mitigate the risk. The research will guide the reader through the operations of online advertising and conduct a literature review in the field of online advertising, traditional revenue management and game theory as these are some of the key concepts used in the model developed in the thesis. The thesis has a practical bias and hence is specific to a particular case in online advertising. However, the model is scalable and hence advertising practitioners, who are looking for new ways to improve revenue can also benefit from this research. The decision choices available to the publisher and advertiser are modeled from a Game Theoretic perspective and Financial Options (European Style) are used to try and reduce the risk of uncertain demand while increasing the revenue for the publisher and the advertising effect of the ads for the advertiser. The research finally concludes with the result that the model developed with options results in 3-20% increase in revenue for the publisher and 5-15% increase in advertising effect for the advertiser over the model without options. A sensitivity analysis is also conducted to understand the impact of various factors on the revenue and advertising effect like the probability distribution of the demand, the relative negotiation powers of the publisher and advertiser and the initially contracted number of displays.