Search engines enable advertisers to target consumers based on the query they have entered.� In a framework with horizontal product differentiation, imperfect product information and in which consumers incur search costs, I study a game in which advertisers have to choose a price and a set of relevant keywords.� The targeting mechanism brings about three kinds of efficiency gains, namely lower search costs, better matching, and more intense product market price-competition.� A monopolistic search engine charges advertisers too high a price, and has incentives to provide a suboptimal matching quality.� Competition among search engines eliminates the latter distortion, but exacerbates the former.
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