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Search Engine Advertising: Pricing Ads to Context

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Abstract

Each search term put into a search engine produces a separate set of results. Correspondingly, each of the sets of ads displayed alongside these results is priced using a separate auction. Search engine advertising prices therefore reflect willingness to pay for context, unlike traditional ad prices that reflect willingness to pay for audience demographics. A growing policy debate asks if this marketing strategy merely makes advertising more informative, or whether it also effectively extracts rent from advertisers. To inform this debate and to better understand search engine advertising more generally, we examine advertising prices paid by lawyers for 174 Google search terms in 195 locations and exploit a natural experiment in “ambulance-chaser” regulations across states. Where contingency fee limits exist, the relative price of advertising is $2.27 lower. This suggests that context-based pricing allows prices to reflect heterogeneity in the profitability of customer leads. When lawyers cannot contact a client in writing, the relative price per ad click is $0.93 higher. This suggests that context-based pricing allows prices to reflect heterogeneity in advertisers’ other advertising options, even within a given local market. Thus, our results suggest that search engine advertising does give market power to the media platform; however, this market power is mitigated by substantial competition from offline marketing communications channels.

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File URL: http://www.netinst.org/Goldfarb-Tucker_07-23.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 07-23.

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Length: 29 pages
Date of creation: Sep 2007
Date of revision: Sep 2007
Handle: RePEc:net:wpaper:0723

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

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Keywords: search engines; advertising; market power; advertising prices;

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Cited by:
  1. Dirk Bergemann & Alessandro Bonatti, 2010. "Targeting in Advertising Markets: Implications for Offline vs. Online Media," Cowles Foundation Discussion Papers 1758, Cowles Foundation for Research in Economics, Yale University.

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