Economic Benefits of AdMediation

In a recent work, Gopal et al. (2003) analyze the business model of admediation to delve into the economics involved and viability of this mechanism. Their research tries to address issues such as compensation policies for consumers for reading e-mails, charges for sellers for sending e- mails through admediary and the impact of admediation on consumer surplus and social welfare.

An important proposition derived from their analysis states that the sellers whose products or services involve higher search costs for customers have significantly higher incentives to participate with admediary . It further says that the e-mail lists compiled by the admediary, for lower search cost products and services, would be highly targeted . The economics of admediation ensure that consumers do not bear the negative externalities of e-mail advertising. As long as the search cost is higher than the cost incurred by a consumer to read an e-mail message, admediary has an incentive to set up an e-mail list. As participation is purely voluntary, admediary ensures that the charges remain attractive for sellers to subscribe. Admediation, unlike UCE, does not impose negative externalities on consumers. In fact, the analysis shows that the consumer surplus with admediation is higher under certain conditions.

An interesting part of the analysis is a proposal for multiple solicitations from the sellers, which is termed as sequential elimination price discrimination. The assumption that value of a product to a consumer discounts over time is crucial in this form of price discrimination. When this discount factor is significant (for instance, seasonal goods), consumers tend to make a purchase as soon as the price is less than their valuation of the product. When this discount factor is negligible, consumers will not make a purchase if they know the price will come down if they wait. When the discount factor is in between, at each subsequent lower price offering, some consumers may wait while others may make a purchase. Clearly price discrimination over time is feasible only if consumers face a penalty or loss of value due to waiting. Such penalties arise in a number of scenarios, including a potential lack of availability of the product in the future or a loss of realized value due to non-consumption for a period of time (Chao & Wilson, 1987; Harris & Raviv, 1981; Png, 1991). The former arises, for example, when limited quantities are produced and there exists a distinct possibility that the product may not be available in the future. An example of the latter is fashion goods, where consumers are willing to pay a higher price when the good is in fashion despite the prospect of a significantly lower price in the future. Another example is seasonal goods (such as golf accessories) whose price is significantly higher at the beginning of the season and declines sharply towards the end of the season. Some consumers succumb to higher prices to ensure usage (and hence realize higher value) over the whole season , rather than wait and then obtain only a limited usage. Such products permit a seller to practice a form of price discrimination that works on the principle of sequential elimination of subscribers from the e-mail list. The analysis indicates that even though this form of price discrimination involves multiple solicitations, the admediary pricing structure ensures that the volume of e-mails remains under check.

The results suggest that price discrimination, when feasible, will emerge as the dominant pricing strategy. Admediary profits, seller profits and participation rates, and social welfare, are all higher in most situations when the price discrimination strategy is implemented. Even the consumer surplus is higher for products and services with higher quality that involve larger search costs for consumers. Interestingly, sellers whose products incur lower search costs on consumers tend to send more sequential solicitations than sellers whose products incur higher search costs. Since higher search costs producers are currently the most common practitioners of UCE, their analysis validates the role of admediation in potentially discouraging UCE. Together these results underscore the economic viability of admediation and its ability to provide significant value-added for all the participating entities. Their analysis suggests that admediation is not a market mechanism that simply transfers the surplus from the consumers to the sellers and the admediary. Under certain conditions, it is a value-creation mechanism where every participating entity realizes increased benefits. For a detailed discussion on these results, the reader is referred to Gopal et al. (2003).

Emerging Landscape: Policy and Players

Currently, admediaries are popular with legitimate and established firms who find the low cost (averaging about $0.1/email) attractive. These firms have realized the negative impact of increasing public outrage towards UCEs on the long-term profitability of their products in the market place. However, there remain business entities that continue to find UCE attractive. To these companies, long- term image of their product factors less into the bottom line, and even the low cost of advertising via an admediary is astronomical compared to the close to zero marginal cost of UCE. Examples include companies peddling pornographic products, and those that solicit money for make-believe business opportunities, investment opportunities, credit card offers, and miracle medical merchandizes.

Effective legislation of UCE is critical for the long-term success of admediation. Without legislation, admediaries have to compete with UCEs for user attention. As the nature of these commercials turn increasingly offensive and deceptive, e-mail users become suspicious of any solicitations via e-mail. As these solicitations become synonymous with scam, it severely inhibits the appeal of admediation. More ominously, filtering software may not be able to distinguish UCE from legitimate messages from admediaries, since UCEs can be disguised as originating from a popular admediary. Negative externality effect would continue to paint the picture, with ISPs and e-mail users bearing most costs of UCE and with marketing effectiveness of admediaries reduced. Many admediaries, realizing the potential damaging role of UCE, have joined the fight against UCEs. If consumers gain legislative protection against UCE, admediation will emerge as the only viable avenue for the dissemination of commercial e-mail messages. E-mail can then be harvested as a powerful advertising tool where both sellers and e-mail users would be better off since the mailings would be targeted, effective, desirable, and yet manageable.

As admediaries collect, group , and organize e-mails sent to their consumer lists in a conscientious way, congestion would be eased and load on ISPs' e-mail servers reduced, which directly benefits ISPs. In addition, being gatekeepers to their subscribers, ISPs control channels that make business-to-buyer communication possible. As such, powerful incentives exist for them to participate in this value-added process. It is increasingly likely that business-to-buyer interactions would be mediated by admediaries and ISPs, with each providing important value-added services. Sellers and consumers, in turn, would be drawn increasingly to using admediaries as they both enjoy the benefits of targeted e-mailing .