Paid placement strategies for internet search engines

Abstract

Internet search engines and comparison shopping have recently begun implementing a paid placement strategy, where some content providers are given prominent positioning in return for a placement fee. This bias generates placement revenues but creates a disutility to users, thus reducing user-based revenues. We formulate the search engine design problem as a tradeoff between these two types of revenues. We demonstrate that the optimal placement strategy depends on the relative benefits (to providers) and disutilities (to users) of paid placement. We compute the optimal placement fee, characterize the optimal bias level, and analyze sensitivity of the placement strategy to various factors. In the optimal paid placement strategy, the placement revenues are set below the monopoly level due to its negative impact on advertising revenues. An increase in the search engine's quality of service allows it to improve profits from paid placement, moving it closer to the ideal. However, an increase in the value-per-user motivates the gatekeeper to increase market share by reducing further its reliance on paid placement and fraction of paying providers.