Cooperative Search Advertising

Marketing Science (2019)

MIT Sloan Research Paper No. 5176-16

73 Pages Posted: 12 Sep 2016 Last revised: 16 Aug 2019

See all articles by Xinyu Cao

Xinyu Cao

Department of Marketing, CUHK Business School

T. Tony Ke

The Chinese University of Hong Kong (CUHK)

Date Written: May 23, 2018

Abstract

Channel coordination in search advertising is an important but complicated managerial decision for both manufacturers and retailers. Due to the highly concentrated market of search advertising, a manufacturer's and its retailers' ads can compete instead of complement with each other. We consider a manufacturer, who coordinates with its retailers by sharing a fixed percentage of each retailer's advertising cost, while at the same time competes with its retailers and outside advertisers in search ads position auctions. Our model prescribes the optimal cooperative advertising strategies from the manufacturer's perspective. We find that different from cooperative advertising in traditional media, it can be optimal for a manufacturer to cooperate with only a subset of its retailers even if they are ex ante the same. This reflects the manufacturer's tradeoff between higher demand and higher bidding cost caused by more intense competition. We also find that with two asymmetric retailers, the manufacturer should support the retailer with higher channel profit per click to get a higher position than the other retailer, which demonstrates the effectiveness of the participation-rate mechanism. The manufacturer should take a higher position than a retailer when its profit per click via direct sales exceeds the channel profit per click of the retailer. The main results still hold when we endogenize retail price competition or wholesale contracts.

Keywords: Search Advertising, Position Auctions, Cooperative Advertising, Channel Coordination

JEL Classification: M31, M37, L86, D44

Suggested Citation

Cao, Xinyu and Ke, Tony, Cooperative Search Advertising (May 23, 2018). Marketing Science (2019), MIT Sloan Research Paper No. 5176-16, Available at SSRN: https://ssrn.com/abstract=2837261 or http://dx.doi.org/10.2139/ssrn.2837261

Xinyu Cao

Department of Marketing, CUHK Business School ( email )

Tony Ke (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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