Advertising or Price? The Efficacy of Quality Informational Cues in Online Sponsored Search Markets

Abstract

The digitization of commerce has caused fundamental changes in consumer information search and use. With an increasing number of consumers using search engines as an integral component of their online purchase process, online sponsored search markets, such as those provided by Google and Yahoo!, have emerged as a dominant customer acquisition mechanism for sellers. Given the extent of information asymmetry in online markets, consumers rely on a number of informational cues or signals to infer the quality of sellers - advertising and price being the two most important among them. While the importance of advertising and price as signals of quality has been well established in traditional markets, online sponsored search markets have a number of unique characteristics that differentiate them from traditional settings and raise unanswered questions about the efficacy of different informational cues for consumers' search and transaction behaviors. Using a lab experiment, we examine how the knowledge of firms' relative advertising expenditures and prices affect consumers' search and purchase decisions. Contrary to earlier findings of the dominance of price signals in traditional markets, we find that firms' relative advertising expenditures serve as a stronger signal of quality in online sponsored search markets - a result attributable to the directional nature of these markets. We also find that the risk attitude of consumers has a significant impact on consumer beliefs and market outcomes. We discuss the implications of our findings for sellers and consumers using sponsored search markets, as well as for search intermediaries.