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Paid Placement: Advertising and Search on the Internet

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  • Yongmin Chen
  • Chuan He

Abstract

Paid placement, where advertisers bid payments to a search engine to have their products appear next to keyword search results, has emerged as a predominant form of advertising on the Internet. This paper studies a product-di¤erentiation model where consumers are initially uncertain about the desirability of and valuation for di¤erent sellers? products, and can learn about a seller?s product through a costly search. In equilibrium, a seller bids more for placement when his product is more relevant for a given keyword, and the paid placement of sellers by the search engine reveals information about the relevance of their products. This results in e¢ cient (sequential) search by consumers and increases total output.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 121 (2011)
Issue (Month): 556 (November)
Pages: F309-F328

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Handle: RePEc:ecj:econjl:v:121:y:2011:i:556:p:f309-f328

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  1. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  2. Anderson, Simon P & Renault, Régis, 2005. "Advertising Content," CEPR Discussion Papers 5064, C.E.P.R. Discussion Papers.
  3. Jennifer F. Reinganum, 1978. "A Simple Model of Equilibrium Price Dispersion," Discussion Papers 335, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Chen, Yongmin, 2000. "Strategic Bidding by Potential Competitors: Will Monopoly Persist?," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 161-75, June.
  5. Krishna, Kala, 1993. "Auctions with Endogenous Valuations: The Persistence of Monopoly Revisited," American Economic Review, American Economic Association, vol. 83(1), pages 147-60, March.
  6. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
  7. Lewis, Tracy R, 1983. "Preemption, Divestiture, and Forward Contracting in a Market Dominated by a Single Firm," American Economic Review, American Economic Association, vol. 73(5), pages 1092-1101, December.
  8. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  9. Bagwell, Kyle & Ramey, Garey, 1994. "Coordination Economies, Advertising, and Search Behavior in Retail Markets," American Economic Review, American Economic Association, vol. 84(3), pages 498-517, June.
  10. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  11. Ganesh Iyer & Amit Pazgal, 2003. "Internet Shopping Agents: Virtual Co-Location and Competition," Marketing Science, INFORMS, vol. 22(1), pages 85-106, November.
  12. Meurer, Michael & Stahl, Dale II, 1994. "Informative advertising and product match," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 1-19, March.
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