Sponsored Search Marketing: Dynamic Pricing and Advertising for an Online Retailer

Management Science, Forthcoming

36 Pages Posted: 21 Nov 2013

See all articles by Shengqi Ye

Shengqi Ye

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies

Goker Aydin

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies

Shanshan Hu

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies

Date Written: September 15, 2013

Abstract

Consider a retailer using sponsored search marketing together with dynamic pricing. The retailer’s bid on a search keyword affects the retailer’s rank among the search results. The higher the rank, the higher the customer traffic and the customers’ willingness-to-pay will be. Thus, the question arises: When a retailer bids higher to attract more customers, should the accompanying price also decrease (to strengthen the bid’s effect on demand) or increase (to take advantage of higher willingness-to-pay)? We find that the answer depends on how fast the retailer increases its bid. In particular, as the end of the season approaches, the optimal bid exhibits smooth increases followed by big jumps. The optimal price increases only when the optimal bid increases sharply, including the instances where the bid jumps up. Such big jumps arise, for example, when the customer traffic is an S-shaped function of the retailer’s bid.

Keywords: sponsored search marketing; dynamic pricing

Suggested Citation

Ye, Shengqi and Aydin, Goker and Hu, Shanshan, Sponsored Search Marketing: Dynamic Pricing and Advertising for an Online Retailer (September 15, 2013). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2357685

Shengqi Ye

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States

Goker Aydin

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States

Shanshan Hu (Contact Author)

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States
812-856-2342 (Phone)

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