Flexible and Committed Advertising Contracts in Electronic Retailing

Many advertising agents offer flexible advertising contracts wherein firms have the flexibility of adjusting their level of advertising during the advertising campaign, whereas some agents also offer committed contracts wherein firms do not have this flexibility. Based on our analysis, we would recommend that e-retailing firms choose the flexible contracts, which give them the flexibility of adjusting their advertising spending during the advertising campaign and make them better off. We also send a clear message to e-retailers that their leverage of engaging in flexible competition is contingent on the size of their operational costs. In particular, as operational costs decrease, they should be more mindful of engaging in the flexible competition. However, from the standpoint of advertising agents (e.g., Facebook.com ), because firms’ advertising efforts are lower in flexible than committed competition, we would recommend that the advertising agents adopt differential pricing schemes under the two modes of competition. In particular, the agents need to offer discounts to the e-retailers signing flexible advertising contracts so as to step up the advertising competition. In addition, our findings also provide the advertising agents with guidance on how to determine the optimal value for the discounts to be offered.