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Keyword Search Advertising and First-Page Bid Estimates: A Strategic Analysis

Author

Listed:
  • Wilfred Amaldoss

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Preyas S. Desai

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Woochoel Shin

    (Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611)

Abstract

In using the generalized second-price (GSP) auction to sell advertising slots, a search engine faces several challenges. Advertisers do not truthfully bid their valuations, and the valuations are uncertain. Furthermore, advertisers are budget constrained. In this paper we analyze a stylized model of the first-page bid estimate (FPBE) mechanism first developed by Google and demonstrate its advantages in dealing with these challenges. We show why and when the FPBE mechanism yields higher profits for the search engine compared with the traditional GSP auction and the GSP auction with advertiser-specific minimum bid. In the event that a high-valuation advertiser is budget constrained, the search engine can use the FPBE mechanism to alter the listing order with the intent of keeping the high-valuation advertiser in the auction for a longer time. The resulting increase in the search engine’s profits is not necessarily at the expense of the advertisers because the combined profits of the advertisers and the search engine increase. This paper was accepted by J. Miguel Villas-Boas, marketing.

Suggested Citation

  • Wilfred Amaldoss & Preyas S. Desai & Woochoel Shin, 2015. "Keyword Search Advertising and First-Page Bid Estimates: A Strategic Analysis," Management Science, INFORMS, vol. 61(3), pages 507-519, March.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:3:p:507-519
    DOI: 10.1287/mnsc.2014.2033
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    References listed on IDEAS

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    Cited by:

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    3. Li, Sanxi & Sun, Hailin & Yu, Jun, 2023. "Competitive targeted online advertising," International Journal of Industrial Organization, Elsevier, vol. 87(C).
    4. Kannan, P.K. & Li, Hongshuang “Alice”, 2017. "Digital marketing: A framework, review and research agenda," International Journal of Research in Marketing, Elsevier, vol. 34(1), pages 22-45.
    5. Kim, Alex Jiyoung & Jang, Sungha & Shin, Hyun S., 2021. "How should retail advertisers manage multiple keywords in paid search advertising?," Journal of Business Research, Elsevier, vol. 130(C), pages 539-551.
    6. Chalil, Tengku Munawar & Dahana, Wirawan Dony & Baumann, Chris, 2020. "How do search ads induce and accelerate conversion? The moderating role of transaction experience and organizational type," Journal of Business Research, Elsevier, vol. 116(C), pages 324-336.
    7. Yu (Jeffrey) Hu & Jiwoong Shin & Zhulei Tang, 2016. "Incentive Problems in Performance-Based Online Advertising Pricing: Cost per Click vs. Cost per Action," Management Science, INFORMS, vol. 62(7), pages 2022-2038, July.
    8. Mohammad Zia & Ram C. Rao, 2019. "Search Advertising: Budget Allocation Across Search Engines," Marketing Science, INFORMS, vol. 38(6), pages 1023-1037, November.
    9. Karthik Kannan & Vandith Pamuru & Yaroslav Rosokha, 2023. "Analyzing Frictions in Generalized Second-Price Auction Markets," Information Systems Research, INFORMS, vol. 34(4), pages 1437-1454, December.
    10. Jiwoong Shin & Woochoel Shin, 2023. "A Theory of Irrelevant Advertising: An Agency-Induced Targeting Inefficiency," Management Science, INFORMS, vol. 69(8), pages 4481-4497, August.
    11. Wilfred Amaldoss & Kinshuk Jerath & Amin Sayedi, 2016. "Keyword Management Costs and “Broad Match” in Sponsored Search Advertising," Marketing Science, INFORMS, vol. 35(2), pages 259-274, March.
    12. Mengzhou Zhuang & Eric (Er) Fang & Jongkuk Lee & Xiaoling Li, 2021. "The Effects of Price Rank on Clicks and Conversions in Product List Advertising on Online Retail Platforms," Information Systems Research, INFORMS, vol. 32(4), pages 1412-1430, December.
    13. Amin Sayedi & Kinshuk Jerath & Marjan Baghaie, 2018. "Exclusive Placement in Online Advertising," Marketing Science, INFORMS, vol. 37(6), pages 970-986, November.
    14. Gielens, Katrijn & Ma, Yu & Namin, Aidin & Sethuraman, Raj & Smith, Ronn J. & Bachtel, Robert C. & Jervis, Suzanne, 2021. "The Future of Private Labels: Towards a Smart Private Label Strategy," Journal of Retailing, Elsevier, vol. 97(1), pages 99-115.
    15. W. Jason Choi & Amin Sayedi, 2023. "Open and Private Exchanges in Display Advertising," Marketing Science, INFORMS, vol. 42(3), pages 451-475, May.

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