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Cooperative Search Advertising

72 Pages Posted: 12 Sep 2016 Last revised: 5 Feb 2018

Xinyu Cao

Massachusetts Institute of Technology (MIT)

Tony Ke

MIT Sloan School of Management

Date Written: February 4, 2018

Abstract

Channel coordination in search advertising is an important but complicated managerial decision for both manufacturers and retailers. Due to the highly concentrated market of search advertising, a manufacturer's and its retailers' ads can compete instead of complement with each other. We consider a manufacturer, who coordinates with its retailers by sharing a fixed percentage of each retailer's advertising cost, while at the same time competes with its retailers and outside advertisers in search ads position auctions. Our model prescribes the optimal cooperative advertising strategies from the manufacturer's perspective. We find that it can be optimal for a manufacturer to cooperate with only a subset of its retailers even if they are ex ante the same. This reflects the manufacturer's tradeoff between higher demand and higher bidding cost caused by more intense competition. With two asymmetric retailers, the manufacturer should support the retailer with higher channel profit per click to get a higher position than the other retailer. The manufacturer should take a higher position than a retailer when its profit per click via direct sales exceeds the channel profit per click of the retailer. We also investigate how a manufacturer uses both wholesaling and advertising contracts to coordinate channels.

Keywords: Search Advertising, Position Auctions, Cooperative Advertising, Channel Coordination

JEL Classification: M31, M37, L86, D44

Suggested Citation

Cao, Xinyu and Ke, Tony, Cooperative Search Advertising (February 4, 2018). MIT Sloan Research Paper No. 5176-16. Available at SSRN: https://ssrn.com/abstract=2837261 or http://dx.doi.org/10.2139/ssrn.2837261

Xinyu Cao

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Tony Ke (Contact Author)

MIT Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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