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Since the advent of the Internet, email has emerged as an important new form of personal communication. The focus of this research is on commercial advertising through the email channel. We analyze the underlying economics of a business model termed admediation that facilitates effective first-contact email advertising. Admediary is a trusted third party that facilitates a mutually desirable communication between buyers and sellers via email, and operates under the ‘opt-in' mode widely supported by the consumer advocacy groups. Our analytical model examines the incentive structures for all participating entities, and derives pricing strategies, profit implications and characteristics of the email lists. We develop and model a form of price discrimination we term sequential elimination price discrimination that can be practiced via email. Our results indicate that the transactions facilitated by the admediary can create significant value whereby every participating entity realizes increased benefits. These findings underscore the potential of admediation to restore email as an effective communication media for online advertising.

Astronomical growth of e-commerce has turned the Internet into a domain of intense corporate activity. E-commerce has provided opportunities for companies, irrespective of their size, to compete globally. This has prompted traditional market players to obtain an e-commerce business strategies to remain competitive in this electronic marketplace. Along with other business functions, there has been a remarkable boost in online-marketing activity, with companies attempting to develop new methodologies to more effectively market their wares online. According to Interactive Advertising Bureau,5 online ad spending in US totaled nearly $2.99 billion in the second quarter of 2005, up more than 26% from the same period in 2004, and increased 6.6% over the first quarter of 2005. For all of 2004, this number totaled $9.6 billion, up 31.5% from the 2003 total of $7.3 billion. As the number of Internet users, estimated at 729.2 million as of March 2004,6 continues to grow, this trend is expected to continue. Internet technologies offer a number of options for pursuing online advertising. The majority of current advertising dollars are generated through banner advertising and content sponsorship over the Web.7 However, according to e-Marketer, an online market research company, email stands out as the “killer-app” of the online advertising world. This is because email can be precision-targeted, responded to instantly, and unbelievably cheap.7 Furthermore, it offers opportunities for private communication, and when properly utilized, helps build consumer trust on a long-term basis. But since its inception, this mode of advertising has been plagued by a problem commonly termed as Unsolicited Commercial Emailing8 (UCE).

The analytical models together with the empirical study provide the following key findings: (1) As long as the search cost for the product or service is larger that the cost to read an email message, the admediary has an incentive to create an email list; (2) the transactions facilitated by the admediary create significant value-added, as evidenced by its positive impact on social welfare; and (3) admediation draws sellers with high search cost products and services. These findings illustrate the potential of admediation to restore email as an effective communication media for online advertising. Our analysis suggests that price discrimination, which entails multiple solicitations, will emerge as the dominant advertising strategy. At the same time, admediation incorporates self-regulatory mechanisms to ensure that consumers do not bear any negative externalities, and that the volume of emails remains under check. For high search cost items, consumers prefer price discrimination as it draws more sellers to participate and hence increases consumer surplus. Currently, most admediaries follow a single solicitation model. By providing full compensation to the consumers and allowing sellers to price discriminate, these organizations can improve their bottom line and gain increased subscription. Our analysis also reveals that the size of the email list is a critical factor that draws sellers.