Position Competition in Sponsored Search Advertising

Abstract

Consumer search activities can be endogenously determined by the ad positions in sponsored search advertising. We model how advertisers compete for ad positions in sponsored listing and conditional on the list of sponsored ads, how online consumers search for information and make purchase decisions. On the consumer side, assuming that users browse information from top to bottom and adopt a sequential search strategy, we develop a two-stage model of consumer search (whether to click and whether to stop the search) that extends the standard sequential search framework in economics literature. On the advertiser side, it is very difficult to fully specify the optimal strategies of advertisers because the equilibrium outcome depends on variables that researchers do not observe. As we have an “incomplete” model of advertiser competition, we propose using the necessary condition that, at equilibrium, no advertiser will find another available ad position more valuable than the one it has chosen. Using a dataset obtained from a search engine, we find that consumers can be classified into two segments which exhibit distinct search behaviors. For advertisers, the value of search advertising comes primarily from terminal clicks which represent the last link (including organic results) clicked by an online user. We also demonstrate that the value of ad positions depends on not only the identities and the positions of the advertisers in sponsored listing but also the composition of online consumers who exhibit distinct search behaviors.