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To Sponsor or not to Sponsor: Sponsored Search Auctions with Organic Links

Author

Listed:
  • Michael Arnold

    () (Department of Economics, University of Delaware)

  • Eric Darmon

    () (CREM, University of Rennes 1, France)

  • Thierry Penard

    () (CREM, University of Rennes 1, France)

Abstract

In 2010 sponsored search advertisements generated over $12 billion in revenue for search engines in the US market and accounted for 46% of online advertising revenue. A substantial portion of this revenue was generated by the sale of search keywords using auction mechanism. We analyze a game-theoretic model to understand the interplay between organic and sponsored links in keyword auctions. Our model allows both the relevance of the advertising firm as well as the position of its sponsored link to impact click-through-rates. Our results demonstrate how the presence of organic links (links generated by the search engine algorithm) may lead to either more or less aggressive bidding for sponsored link positions depending on consumers attitudes toward sponsored links and the extent to which sponsored and organic links are complements or substitutes. In contrast to equilibrium results in existing literature, the firm with the highest value per click does not necessarily win the first spot in the sponsored search listing. It also may be optimal for a firm to bid an amount greater than the expected value (or sale) from a click.

Suggested Citation

  • Michael Arnold & Eric Darmon & Thierry Penard, 2012. "To Sponsor or not to Sponsor: Sponsored Search Auctions with Organic Links," Working Papers 12-04, University of Delaware, Department of Economics.
  • Handle: RePEc:dlw:wpaper:12-04.
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    References listed on IDEAS

    as
    1. Lesley Chiou & Catherine Tucker, 2012. "How Does the Use of Trademarks by Third-Party Sellers Affect Online Search?," Marketing Science, INFORMS, vol. 31(5), pages 819-837, September.
    2. Taylor, Greg, 2011. "The informativeness of on-line advertising," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 668-677.
    3. White, Alexander, 2013. "Search engines: Left side quality versus right side profits," International Journal of Industrial Organization, Elsevier, vol. 31(6), pages 690-701.
    4. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    sponsored search; organic search; online advertising; keyword auction;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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