Location, Location, Location: An Analysis of Profitability of Position in Online Advertising Markets

Abstract

The authors evaluate the impact of ad placement on revenues and profits generated from sponsored search. Their approach uses data generated through a field experiment for several keywords from an online retailer's ad campaign. Using a hierarchical Bayesian model, the authors measure the impact of ad placement on both click-through and conversion rates. They find that while click-through rate decreases with position, conversion rate increases with position and is even higher for more specific keywords. The net effect is that, contrary to the conventional wisdom in the industry, the topmost position is not necessarily the revenue-or profit-maximizing position. The authors’ results inform the advertising strategies of firms participating in sponsored search auctions and provide insight into consumer behavior in these environments. Specifically, they help correct a significant misunderstanding among advertisers regarding the value of the top position. Furthermore, they reveal potential inefficiencies in current auction mechanisms that search engines use. The authors’ results also reveal the information search strategies that consumers use in sponsored search and provide evidence of recency bias for immediate purchases.