47 Pages Posted: 12 Sep 2016
Date Written: September 1, 2016
Channel coordination in search advertising is an important but complicated managerial decision for both manufacturers and retailers. A manufacturer can sponsor retailers to advertise his products while at the same time compete with them in position auctions. We model a manufacturer and retailers' cooperation and intra-brand competition in advertising, as well as inter-brand competition with other advertisers. We consider a simple coordination mechanism where a manufacturer shares a fixed percentage of a retailer's advertising cost. Our model prescribes the optimal cooperative advertising strategies from the manufacturer's perspective. We find that it can be optimal for a manufacturer not to cooperate with all his retailers even if they are ex ante the same. This reflects the manufacturer's trade-off between a higher demand versus a higher bidding cost resulting from more competition. We also find that an advertiser's position rank in equilibrium is entirely determined by his channel profit per click, no matter he is a manufacturer or retailer. Consequently, when determining whether to advertise directly to consumers or via retailers, a manufacturer should compare his profit per click from direct sales with the retailer's total channel profit per click; similarly, when choosing which retailer to sponsor, a manufacturer should compare their total channel profits per click. We also investigate how a manufacturer uses both wholesaling and advertising contracts to coordinate channels with endogenous retail prices.
Keywords: Search Advertising, Position Auctions, Cooperative Advertising, Channel Coordination
JEL Classification: M31, M37, L86, D44
Suggested Citation: Suggested Citation
Cao, Xinyu and Ke, T. Tony, Cooperative Search Advertising (September 1, 2016). MIT Sloan Research Paper No. 5176-16. Available at SSRN: https://ssrn.com/abstract=2837261 or http://dx.doi.org/10.2139/ssrn.2837261