Investigating the Spillover Effect of Keyword Market Entry in Sponsored Search Advertising

63 Pages Posted: 6 Jan 2017

See all articles by Shijie Lu

Shijie Lu

University of Houston - C.T. Bauer College of Business

Sha Yang

University of Southern California - Marshall School of Business

Date Written: 2017

Abstract

As Internet advertising infomediaries nowadays provide rich competition information, sponsored search advertisers are becoming more strategic when selecting keywords. This paper empirically examines the spillover effects in advertisers’ keyword market entry decisions, that is, how an advertiser’s likelihood of using a keyword is affected by competitors’ keyword entry decisions. We develop a structural model to characterize advertisers’ keyword market entry decisions. We apply the model to a panel dataset of 1,252 laptop-related keywords mainly used by 28 manufacturers, retailers, and comparison websites that advertise on Google. Our analysis leads to several interesting findings. First, an advertiser’s expected position affects the nature of the competition. In particular, the spillover effect from below-ranked competitors is always positive, while the spillover effect from above-ranked competitors is either positive or negative. Second, the spillover effect from above-ranked ads is directionally affected by firms’ product-line characteristics: the effect among firms offering homogenous products (e.g. comparison sites) is negative, whereas the effect among firms with more differentiated products (e.g. manufacturers and retailers) is positive. Third, the spillover effect from above-ranked ads is directionally affected by firms’ positions in a distribution channel: the effect from upstream (downstream) on downstream (upstream) firms tends to be negative (positive). Finally, a downstream firm is more likely to learn new keywords from an upstream firm but not vice versa. Our counterfactual simulations demonstrate that the keyword-specific competition information provided by infomediaries can improve the search engine’s revenue by about 5.7%.

Keywords: Search Advertising, Competition, Distribution Channel, Entry Game, Keyword Selection, Infomediary, Internet Marketing, Bayesian Estimation

Suggested Citation

Lu, Shijie and Yang, Sha, Investigating the Spillover Effect of Keyword Market Entry in Sponsored Search Advertising (2017). Forthcoming at Marketing Science; Marshall School of Business Working Paper No. 17-18. Available at SSRN: https://ssrn.com/abstract=2893458 or http://dx.doi.org/10.2139/ssrn.2893458

Shijie Lu (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Sha Yang

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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