Keyword Management Costs and 'Broad Match' in Sponsored Search Advertising

51 Pages Posted: 28 Mar 2015

See all articles by Wilfred Amaldoss

Wilfred Amaldoss

Duke University - Fuqua School of Business

Kinshuk Jerath

Columbia University - Columbia Business School

Amin Sayedi

Carnegie Mellon University - David A. Tepper School of Business

Date Written: December 2104

Abstract

In sponsored search advertising, advertisers bid to be displayed in response to a keyword search. The operational activities associated with participating in an auction — submitting the bid and the ad copy, customizing bids and ad copies based various factors (such as the geographical region the query originated from, the time of day and the season, the characteristics of the searcher) and continuously measuring outcomes — involve considerable effort. We call the costs that arise from such activities as keyword management costs. To reduce these costs and increase advertisers’ participation in keyword auctions, search engines offer an opt-in tool called broad match with automatic and flexible bidding, wherein the search engine automatically places bids on behalf of the advertisers and takes over the above activities as well. The bids are based on the search engine’s estimates of the advertisers’ valuations and, therefore, may be less accurate than the bids the advertisers would have turned in themselves. Using a game-theoretic model, we examine the strategic role of keyword management costs, and of broad match, in sponsored search advertising. We show that because these costs inhibit participation by advertisers in keyword auctions, the search engine has to reduce the reserve price, which reduces the search engine’s profits. This motivates the search engine to offer broad match as a tool to reduce keyword management costs. If the accuracy of broad match bids is high enough, advertisers adopt broad match and benefit from the cost reduction, whereas if the accuracy is very low, advertisers do not use it. Interestingly, at moderate levels of bid accuracy, advertisers individually find it attractive to reduce costs by using broad match, but competing advertisers also adopt broad match and the increased competition hurts all advertisers’ profits, and thus a “prisoner’s dilemma” arises. Adoption of broad match by advertisers increases search engine profits, and it therefore seems natural to expect that the search engine will be motivated to improve broad match accuracy. Our analysis shows that the search engine will increase broad match accuracy up to the point where advertisers choose broad match, but increasing the accuracy any further reduces the search engine’s profits.

Keywords: aid search advertising, position auctions, bidding costs, automatic bidding, game theory

JEL Classification: D44, M31, M37

Suggested Citation

Amaldoss, Wilfred and Jerath, Kinshuk and Sayedi, Amin, Keyword Management Costs and 'Broad Match' in Sponsored Search Advertising (December 2104). Columbia Business School Research Paper No. 15-37. Available at SSRN: https://ssrn.com/abstract=2585593 or http://dx.doi.org/10.2139/ssrn.2585593

Wilfred Amaldoss

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-1894 (Phone)

Kinshuk Jerath (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Amin Sayedi

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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