32 Pages Posted: 2 Dec 2011 Last revised: 19 Aug 2014
Date Written: June 18, 2013
Search engines enable advertisers to target consumers based on the query they have entered. In a framework in which consumers search sequentially after having entered a query, I show that targeting reduces search costs, improves matches and intensifies price competition. However, a profit-maximizing search engine imposes a distortion by charging too high an advertising fee, which may negate the benefits of targeting. The search engine also has incentives to provide a suboptimal quality of sponsored links. Competition among search engines can increase or decrease welfare, depending on the downstream market structure.
Keywords: search engine, targeted advertising, consumer search
JEL Classification: D43, D83, L13, M37
Suggested Citation: Suggested Citation