26 Pages Posted: 12 Jan 2010 Last revised: 28 Sep 2013
Date Written: September 27, 2013
We present a two-stage model of competing ad auctions. Search engines attract users via Cournot-style competition. Meanwhile, each advertiser must pay a participation cost to use each ad platform, and advertiser entry strategies are derived using symmetric Bayes-Nash equilibrium that lead to the VCG outcome of the ad auctions. Consistent with our model of participation costs, we find empirical evidence that multi-homing advertisers are larger than single-homing advertisers. We then link our model to search engine market conditions: We derive comparative statics on consumer choice parameters, presenting relationships between market share, quality, and user welfare. We also analyze the prospect of joining auctions to mitigate participation costs, and we characterize when such joins do and do not increase welfare.
Suggested Citation: Suggested Citation
Ashlagi, Itai and Edelman, Benjamin G. and Lee, Hoan Soo, Competing Ad Auctions (September 27, 2013). Harvard Business School NOM Unit Working Paper No. 10-055. Available at SSRN: https://ssrn.com/abstract=1535448 or http://dx.doi.org/10.2139/ssrn.1535448