Price Competition and Endogenous Valuation in Search Advertising

Journal of Marketing Research, Vol. 48, No. 3, pp. 566-586, 2011

McCombs Research Paper Series No. IROM-11-09

Posted: 4 Mar 2009 Last revised: 27 Oct 2015

See all articles by Lizhen Xu

Lizhen Xu

Georgia Institute of Technology - Scheller College of Business

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management

Date Written: July 24, 2008

Abstract

This paper studies how to endogenously assess the value of a “superior” advertising position within the price competition and examines the resulting location competition outcomes and price dispersion patterns. We consider a game-theoretic model in which firms compete for advertising positions and then compete in price for customers in a product market. Firms differ in their competence, and positions are differentiated in their prominence, which reflects consumers' online search behavior. We find that when endogenously evaluated within the product market competition, a prominent advertising position might not always be desirable for a firm with competitive advantage, even if it is cost-free. The profitability of a prominent advertising position depends on the trade-off between the extra demand from winning the position and the higher equilibrium prices when the weaker competitor wins it. We also show that the bidding outcome might not align with the relative competitive strength, and an advantaged firm might not be able to win the prominent position even when it does value that position. We derive two-dimensional equilibrium price dispersion, with the realized prices at the same position varying and the expected prices differing across different positions. We find that the expected price in the prominent position might not always be higher, implying that an expensive location does not necessarily lead to expensive products.

Keywords: Price Competition, Endogenous Valuation, Search Advertising, Online Search, Price Dispersion, Bidding Incentive

Suggested Citation

Xu, Lizhen and Chen, Jianqing and Whinston, Andrew B., Price Competition and Endogenous Valuation in Search Advertising (July 24, 2008). Journal of Marketing Research, Vol. 48, No. 3, pp. 566-586, 2011 ; McCombs Research Paper Series No. IROM-11-09. Available at SSRN: https://ssrn.com/abstract=1350510

Lizhen Xu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

United States
404-894-4380 (Phone)
404-894-6030 (Fax)

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-8879 (Phone)

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