Analyzing the Relationship between Organic and Sponsored Search Advertising: Positive, Negative or Zero Interdependence?

Abstract

The phenomenon of paid search advertising has now become the most predominant form of online advertising in the marketing world. However, we have little understanding of the impact of search engine advertising on consumers' responses in the presence of organic listings of the same firms. In this paper, we model and estimate the inter-relationship between organic search listings and paid search advertisements using a unique panel dataset based on aggregate consumer response to several hundred keywords over three months collected from a major nationwide retailer store chain that advertises on Google. In particular, we focus on understanding whether the presence of organic listings on a search engine is associated with a positive, negative or no effect on the click-through rates of paid search advertisements, and vice-versa for a given firm. We first build an integrated model to estimate the relationship between different metrics such as search volume, click-through rates, conversion rates, cost-per-click and keyword ranks. A Hierarchical Bayesian modeling framework is used and the model is estimated using Markov Chain Monte Carlo (MCMC) methods. Our empirical findings suggest that click-throughs on organic listings have a positive interdependence with click-throughs on paid listings, and vice-versa. We also find that this positive interdependence is asymmetric such that on an average the impact of organic clicks on increases in paid clicks is 3.5 times stronger than vice-versa. Using counter-factual experiments, we show that on an average this positive interdependence leads to an increase in expected profits for the firm ranging from 4.2 % to 6.15 % when compared to profits in the absence of this interdependence. To further validate our empirical identification, we also conduct and present the results from a controlled field experiment. This experiment shows that total click-through rates, conversions rates and revenues in the presence of both paid and organic search listings are significantly higher than those in the absence of paid search advertisements. The positive interdependence effect predicted by the econometric model is also corroborated in controlled experiments and potentially suggests a causal interpretation to the results obtained from the econometric model. Given the increased spending on search engine based advertising, our analysis provides critical insights to managers in both traditional and Internet firms.

Keywords: Paid search advertising, Organic search listings, Search engines, Click-through rates, Conversion rates, Electronic commerce, Internet markets, Monetization of user - generated content, Hierarchical Bayesian modeling

JEL Classification: C33, C51, D12, L10, M31, M37, L81