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The Race for Sponsored Links: Bidding Patterns for Search Advertising

Author

Listed:
  • Zsolt Katona

    () (Haas School of Business, University of California at Berkeley, Berkeley, California 94720)

  • Miklos Sarvary

    () (INSEAD, Fontainebleau, 77305 France)

Abstract

Paid placements on search engines reached sales of nearly $11 billion in the United States last year and represent the most rapidly growing form of online advertising today. In its classic form, a search engine sets up an auction for each search word in which competing websites bid for their sponsored links to be displayed next to the search results. We model this advertising market, focusing on two of its key characteristics: (1) the interaction between the list of search results and the list of sponsored links on the search page and (2) the inherent differences in attractiveness between sites. We find that both of these special aspects of search advertising have a significant effect on sites' bidding behavior and the equilibrium prices of sponsored links. Often, sites that are not among the most popular ones obtain the sponsored links, especially if the marginal return of sites on clicks is quickly decreasing and if consumers do not trust sponsored links. In three extensions, we also explore (1) heterogeneous valuations across bidding sites, (2) the endogenous choice of the number of sponsored links that the search engine sells, and (3) a dynamic model where websites' bidding behavior is a function of their previous positions on the sponsored list. Our results shed light on the seemingly random order of sites on search engines' list of sponsored links and their variation over time. They also provide normative insights for both buyers and sellers of search advertising.

Suggested Citation

  • Zsolt Katona & Miklos Sarvary, 2010. "The Race for Sponsored Links: Bidding Patterns for Search Advertising," Marketing Science, INFORMS, vol. 29(2), pages 199-215, 03-04.
  • Handle: RePEc:inm:ormksc:v:29:y:2010:i:2:p:199-215
    DOI: 10.1287/mksc.1090.0517
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    File URL: http://dx.doi.org/10.1287/mksc.1090.0517
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    References listed on IDEAS

    as
    1. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    2. Juan Feng, 2008. "—Optimal Mechanism for Selling a Set of Commonly Ranked Objects," Marketing Science, INFORMS, vol. 27(3), pages 501-512, 05-06.
    3. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords," American Economic Review, American Economic Association, vol. 97(1), pages 242-259, March.
    4. Yongmin Chen & Chuan He, 2011. "Paid Placement: Advertising and Search on the Internet," Economic Journal, Royal Economic Society, vol. 121(556), pages 309-328, November.
    5. J. Miguel Villas-Boas, 1993. "Predicting Advertising Pulsing Policies in an Oligopoly: A Model and Empirical Test," Marketing Science, INFORMS, vol. 12(1), pages 88-102.
    6. Elie Ofek & Miklos Sarvary, 2003. "R&D, Marketing, and the Success of Next-Generation Products," Marketing Science, INFORMS, vol. 22(3), pages 355-370, July.
    7. Zsolt Katona & Miklos Sarvary, 2008. "Network Formation and the Structure of the Commercial World Wide Web," Marketing Science, INFORMS, vol. 27(5), pages 764-778, 09-10.
    8. Avi Goldfarb & Catherine Tucker, 2007. "Search Engine Advertising: Pricing Ads to Context," Working Papers 07-23, NET Institute, revised Sep 2007.
    9. Song Yao & Carl F. Mela, 2008. "A Dynamic Model of Sponsored Search Advertising," Working Papers 08-16, NET Institute, revised Sep 2008.
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