IDEAS home Printed from https://ideas.repec.org/p/net/wpaper/0527.html
   My bibliography  Save this paper

Quality Uncertainty And Adverse Selection In Sponsored Search Markets

Author

Listed:
  • 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)

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.

Suggested Citation

  • Animesh Animesh & Vandana Ramachandran & Siva Viswanathan, 2005. "Quality Uncertainty And Adverse Selection In Sponsored Search Markets," Working Papers 05-27, NET Institute, revised Oct 2005.
  • Handle: RePEc:net:wpaper:0527
    as

    Download full text from publisher

    File URL: http://www.netinst.org/Siva.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-450, June.
    2. 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.
    3. 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, Oxford University Press, vol. 16(4), pages 433-441, March.
    4. Alexandre Gaudeul, 2004. "Internet Intermediaries' Editorial Content Quality," Industrial Organization 0409005, EconWPA.
    5. 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 453-476, June.
    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.
    8. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    9. 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.
    10. Laurent Linnemer, 2002. "Price and advertising as signals of quality when some consumers are informed," Post-Print hal-01629769, HAL.
    11. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    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.
    13. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:net:wpaper:0527. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nicholas Economides). General contact details of provider: http://www.NETinst.org/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.