To Sponsor or Not to Sponsor: Sponsored Search Auctions with Organic Links
32 Pages Posted: 5 Jun 2014
Date Written: April 10, 2013
Sponsored search advertisements are an essential component of e-marketing strategies and a substantial source of revenue for search engines. Most sponsored ads are sold through keyword auctions. We analyze a game-theoretic model to explore the impact of organic links (links generated by the search engine algorithm) on firms' bidding strategies in sponsored link keyword auctions. In contrast to results in earlier literature, we find that with organic links the firm with the highest value per click does not necessarily win the first sponsored position, it may be optimal for a firm to bid an amount greater than the expected value (or sale) from a click, and firms may choose not to bid even if they would incur no cost for the sponsored link.
Keywords: Online advertising, Sponsored links, Position auctions, Search engine
JEL Classification: D44, L86, M37
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