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Quality Uncertainty And Adverse Selection In Sponsored Search Markets

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Author Info

  • Animesh Animesh

    ()
    (Robert H Smith School of Business University of Maryland)

  • Vandana Ramachandran

    ()
    (Robert H Smith School of Business University of Maryland)

  • Siva Viswanathan

    ()
    (Robert H Smith School of Business University of Maryland)

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    Abstract

    Sponsored search mechanisms, where advertisers bid for placement to be as close to the top in the listing of search results, are the fastest growing among online search models. Sponsored search in popular search services such as Google and Yahoo! employ an auction mechanism wherein firms can bid, for a better placement in the (sponsored) search results, on relevant keywords used by consumers in their search process. This provides an unprecedented opportunity to test some of the predictions of earlier research relating quality and advertising, in the online setting. While sponsored search mechanisms have been gaining popularity, they can potentially introduce a bias in the listing of search results. In particular, sponsored search mechanisms that enable low quality bidders to be placed at the top of the search listings can adversely affect consumer welfare. Our study uses data from online sponsored search auctions to examine the relationship between advertisers’ quality and their bidding strategies. Specifically we seek to understand if advertisers’ bidding strategies differ across products characterized by different degrees of quality-uncertainty. Our results indicate that there are significant differences in the bidding strategies of sellers of search goods as compared to sellers of experience and credence goods, and that there is significant adverse selection in product categories characterized by greater uncertainty. We discuss the implications of our findings for consumers, advertisers, and intermediaries and provide directions for future research in this emerging context.

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    Bibliographic Info

    Paper provided by NET Institute in its series Working Papers with number 05-27.

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    Length: 28 pages
    Date of creation: Oct 2005
    Date of revision: Oct 2005
    Handle: RePEc:net:wpaper:0527

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    Web page: http://www.NETinst.org/

    Related research

    Keywords: sponsored search; keyword advertising; pay-for-performance; search; credence; experience;

    This paper has been announced in the following NEP Reports:

    References

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    1. Wujin Chu & Woosik Chu, 1994. "Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent," Marketing Science, INFORMS, vol. 13(2), pages 177-189.
    2. Alexandre Gaudeul, 2004. "Internet Intermediaries' Editorial Content Quality," Industrial Organization 0409005, EconWPA.
    3. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
    4. Robert B. Ekelund & Franklin G. Mixon & Rand W. Ressler, 1995. "Advertising and information: an empirical study of search, experience and credence goods," Journal of Economic Studies, Emerald Group Publishing, vol. 22(2), pages 33-43, May.
    5. Ford, Gary T & Smith, Darlene B & Swasy, John L, 1990. " Consumer Skepticism of Advertising Claims: Testing Hypotheses from Economics of Information," Journal of Consumer Research, University of Chicago Press, vol. 16(4), pages 433-41, March.
    6. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    7. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, Octomber.
    8. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
    9. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    10. Comanor, William S & Wilson, Thomas A, 1979. "The Effect of Advertising on Competition: A Survey," Journal of Economic Literature, American Economic Association, vol. 17(2), pages 453-76, June.
    11. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
    12. Klein, Lisa R., 1998. "Evaluating the Potential of Interactive Media through a New Lens: Search versus Experience Goods," Journal of Business Research, Elsevier, vol. 41(3), pages 195-203, March.
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