Online Keyword Based Advertising: Impact of Ad Impressions on Own-Channel and Cross-Channel Click-Through Rates

Abstract

Keyword-based ads are becoming the dominant form of advertising online as they enable customization and tailoring of messages relevant to potential consumers. Two prominent channels within this sphere are the search channel and the content channel. We empirically examine the interaction between these two channels. Our results indicate significant cannibalization across the two channels, as well as significant diminishing returns to impressions within each channel. This suggests that under certain conditions, both channels may need to be used to optimize returns to advertising, both for advertisers and service providers such as Google. Our game theoretic analysis which builds upon our empirical findings reveals that for intermediate budget values, it is optimal to use both channels, whereas for very low (very high) budget values, it is optimal to use only the content (search) channel. Further, as budget increases, the advertiser should offer more for ads displayed on the search channel to optimally incentivize the service provider.

Keywords: online keyword-based advertising, channel cannibalization, within-channel decreasing returns to impressions

JEL Classification: M37, C3, C7