Paid Placement: Advertising and Search on the Internet

20 Pages Posted: 25 Oct 2011

See all articles by Yongmin Chen

Yongmin Chen

University of Colorado at Boulder - Department of Economics

Chuan He

University of Colorado at Boulder - Leeds School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 2011

Abstract

Paid placement, where advertisers bid payments to a search engine to have their products displayed prominently among the results of a keyword search, has emerged as a predominant form of advertising on the Internet. This article studies a model of product differentiation in which the auction of advertisement positions is embedded in a market game of consumer search. In equilibrium, more relevant sellers for a given keyword bid more and their paid placement by the search engine reveals information about the relevance of their products. This results in efficient sequential search by consumers and increases total output. We also find that the search engine's revenue may have an inverted U‐shape with respect to the match probability of the most relevant seller.

Suggested Citation

Chen, Yongmin and He, Chuan, Paid Placement: Advertising and Search on the Internet (November 2011). The Economic Journal, Vol. 121, Issue 556, pp. F309-F328, 2011. Available at SSRN: https://ssrn.com/abstract=1948943 or http://dx.doi.org/10.1111/j.1468-0297.2011.02466.x

Yongmin Chen

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
303-492-8736 (Phone)
303-492-8960 (Fax)

Chuan He

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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