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Paid Placement: Advertising and Search on the Internet

Author

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  • Yongmin Chen

    () (University of Colorado at Boulder)

  • Chuan He

    () (University of Colorado at Boulder)

Abstract

Paid placement, where advertisers bid payments to a search engine to have their products appear next to keyword search results, has emerged as a predominant form of advertising on the Internet. This paper studies a product-di¤erentiation model where consumers are initially uncertain about the desirability of and valuation for di¤erent sellers? products, and can learn about a seller?s product through a costly search. In equilibrium, a seller bids more for placement when his product is more relevant for a given keyword, and the paid placement of sellers by the search engine reveals information about the relevance of their products. This results in e¢ cient (sequential) search by consumers and increases total output.

Suggested Citation

  • Yongmin Chen & Chuan He, 2006. "Paid Placement: Advertising and Search on the Internet," Working Papers 06-02, NET Institute, revised Sep 2006.
  • Handle: RePEc:net:wpaper:0602
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    References listed on IDEAS

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    10. Krishna, Kala, 1993. "Auctions with Endogenous Valuations: The Persistence of Monopoly Revisited," American Economic Review, American Economic Association, vol. 83(1), pages 147-160, March.
    11. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-1579, September.
    12. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
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    Keywords

    Paid placement; Advertising; Auction; E-commerce; Search;

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