Competing 'Creatively' in Online Markets: Evidence from Sponsored Search

Abstract

Although the efficiency-enhancing features of online markets have been well studied, much less is known about firms' differentiation strategies in these competitive markets, or the outcomes of such differentiation. This study examines competition among firms in online sponsored search markets - one of the fastest growing and most competitive of online markets. Given the nascence of online sponsored search and the lack of sophisticated differentiation strategies, firms have primarily sought to be listed on top of the search results, leading to intense competition. With the rapid evolution of sponsored search markets from simple auctions to sophisticated forums for customer acquisition, the need to go beyond a myopic focus on competing for the top slots and seek effective differentiation strategies is becoming clear. In this paper we develop and test a model that predicts the clickthrough rate (CTR) of a seller's listing in a sponsored search setting. Drawing upon consumer search theory and competitive positioning strategies we theorize that the CTR is jointly driven by the seller's positioning strategy as reflected by the unique selling proposition (USP) in its "ad-creative," by its rank in the sponsored search listing, and the nature of competition around the focal seller's listing. We use data from a field experiment conducted by leading firm in the mortgage industry where the firm varied its rank and USP dynamically. Results suggest that sponsored search listings can act as an effective customer segmentation mechanism, consistent with a model of consumer search in directional markets. We further find that the effect of the firm's positioning strategy and its rank in the listing on CTR is strongly moderated by its ability to differentiate itself from adjacent rivals. We discuss the implications of our findings for sellers' strategies in sponsored search markets and for extending understanding of consumer search behavior in directional markets.

Keywords: Sponsored Search, Digital Competition, Online Markets, Online Advertising, Differentiation Strategies