Effects of the Presence of Organic Listing in Search Advertising

Information Systems Research, Vol. 23, No. 4, pp. 1284-1302, 2012

McCombs Research Paper Series No. IROM-13-09

48 Pages Posted: 27 May 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: May 23, 2009

Abstract

This paper analyzes how the presence of organic listing as a competing information source affects advertisers' sponsored bidding and the equilibrium outcomes in search advertising. We consider a game-theoretic model in which two firms bid for sponsored advertising slots provided by a monopolistic search engine and then compete for consumers in price in the product market. Firms are asymmetrically differentiated in market preference and are given different exposure in organic listing aligned with their market appeal. We identify two aspects of a firm's sponsored bidding incentive, namely, the promotive and the preventive incentives. The presence of organic listing alters firms' sponsored bidding incentives such that the stronger firm has primarily preventive incentive, whereas the weaker has mainly promotive incentive. We show that the preventive incentive decreases and the promotive incentive increases as the difference in firms' market appeal decreases, and as a result, even the weaker firm may outbid the stronger competitor under such a co-listing setting. We further examine how the presence of organic listing affects the equilibrium outcomes by comparing it with a benchmark case in which there is only a sponsored list. We show that the differentiated exposure in the organic list gives the weaker advertiser chances to win a better sponsored position, which improves the overall information structure the search engine provides. As a result, the equilibrium social welfare, sales diversity, and consumer surplus increase. Although the presence of the free exposure from the organic list may reduce advertisers' sponsored bidding incentive per se, the overall effect benefits the search engine's growth in the long run.

Keywords: Organic Listing, Sponsored Bidding, Search Advertising, Information Structure, Asymmetric Differentiation, Price Competition

Suggested Citation

Xu, Lizhen and Chen, Jianqing and Whinston, Andrew B., Effects of the Presence of Organic Listing in Search Advertising (May 23, 2009). Information Systems Research, Vol. 23, No. 4, pp. 1284-1302, 2012 ; McCombs Research Paper Series No. IROM-13-09. Available at SSRN: https://ssrn.com/abstract=1409450 or http://dx.doi.org/10.2139/ssrn.1409450

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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