A Strategic Group Analysis of Competitor Behavior in Search Advertising

Abstract

Firms compete intensely in sponsored search. Their bidding strategies hinge on understanding who competes with whom, how they compete, and how consumers react to competing advertisements. In this context, we investigate how firm competition impacts consumers’ click-through behaviors in search advertising from a strategic group perspective. Using search results from Google and consumers’ clickstream data, we found strong negative externality for competitors within the same strategic group relative to competitors across strategic groups: firms reap fewer click-throughs when an advertisement of another firm from the same strategic group is also displayed in search results, relative to when other displayed advertisers are not from the same group. This indicates that when competitors from the same strategic group are likely to appear in the results of a sponsored search auction, the focal firm would be better off avoiding head-to-head competition in the auction. However, we did not find empirical evidence of such firm behaviors, suggesting myopia or the inability of firms to avoid such competition. We also show that when multiple firms from the same strategic group appear in search results, the closer the focal firm is located to such competing firms, the more click-throughs the firm accrues. This suggests that firms should stay close to their within-group competitors when they compete in the same search auction. Further, our empirical results indicate that firms are indeed doing so. Using another set of data from Google AdWords reports, we show that our findings are also robust to multi-keyword bidding scenarios. These findings represent the first attempt to understand the impact of strategic groups in search advertising and provide interesting implications for advertisers and search engines.