Competitive Poaching in Sponsored Search Advertising and Its Strategic Impact on Traditional Advertising

Abstract:     
Traditional advertising, such as TV and print advertising, primarily builds awareness of a firm's product among consumers. On the other hand, sponsored search advertising can target consumers in a later stage of the purchase process because they self-identify themselves by searching for a relevant keyword on a search engine. The ability to target these consumers who are closer to making a purchase induces competitors to "poach" these consumers by directly advertising on the firm's keywords. Using a game theory model, we study how competing firms should allocate their advertising budgets, and how a search engine should design the sponsored search position auction for deciding the order in which advertisers are displayed. We find that symmetric firms may follow asymmetric advertising strategies, with one firm focusing on traditional advertising and the other firm focusing on sponsored search with poaching. Interestingly, the search engine benefits from handicapping poaching, i.e., it benefits from discouraging competition in its own auctions. This explains why search engines such as Google, Yahoo! and Bing use "keyword relevance" scores to under-weight the bids of firms bidding on competitors' keywords. We also obtain various other interesting insights on the interplay between sponsored search advertising and traditional advertising.

Number of Pages in PDF File: 50

Keywords: Advertising channels, sponsored search, consumer purchase stages, game theory, auctions, poaching, bidding on trademark keywords

JEL Classification: D44, M31, M37

working papers series