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Cooperative Search Advertising

47 Pages Posted: 12 Sep 2016  

Xinyu Cao

Massachusetts Institute of Technology (MIT)

T. Tony Ke

MIT Sloan School of Management

Date Written: September 1, 2016

Abstract

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

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

Xinyu Cao

Massachusetts Institute of Technology (MIT) ( email )

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

Te Ke (Contact Author)

MIT Sloan School of Management ( email )

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

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