TITLE:
Selecting and Remunerating Advertising Agencies: A Signaling Theoretical Perspective
AUTHORS:
Jacob Hornik
KEYWORDS:
Ad Agencies, Game Theory, Signaling Theory, Auction Theory, Pay-by-Results, Compensation
JOURNAL NAME:
Journal of Service Science and Management,
Vol.16 No.3,
May
10,
2023
ABSTRACT: Advertising agencies have historically received a
major share of their compensation as a commission or on the basis of one or more fee
structures. However, during the last few
years, agencies are under heavy pressure to demonstrate their accountability and prove the value of their contribution to
the advertiser, by using some performance-based compensation. However, there are some conflicts between the advertiser and the agency
mainly because of different objectives and risk preferences, which leads
to favor of different courses of action. So far, most studies conducted with the aim of resolving these conflicts and reconciling
the interests of both parties have relied on agency theory, but failed to lead to a
stable equilibrium for both parties. In this study, we offer a theoretical
model based on signaling theory, which leads to a stable optimal solution for both parties. We critically examine
the motivations and conflicts arising in the evolvement of a suitable
remuneration system and the means of
resolutions available to both parties for a satisfying contract. Also, we
develop an auction theoretical model for selecting full-service advertising agencies considering the interdependencies among evaluation criteria. Our
findings provide practical guidelines for ad agency selection and compensation.