Dynamic Budget Allocation in Competitive Search Advertising

32 Pages Posted: 6 Feb 2017 Last revised: 10 Jun 2017

See all articles by Yanwu Yang

Yanwu Yang

School of Management, Huazhong University of Science and Technology

Yinghui (Catherine) Yang

Graduate School of Management, UC Davis

Dengpan Liu

Tsinghua University, School of Economics and Management

Daniel Dajun Zeng

University of Arizona - Department of Management Information Systems

Date Written: June 1, 2016

Abstract

Search advertising marketplace is highly competitive in nature. As such, advertisers have to consider their competitors' responses when making advertising decisions, which concern both bid determination in individual keyword auction instances, and budget allocation over time at the aggregate market level. Although bidding decisions have been extensively treated in competitive auction settings in the literature, competitive budgeting models are yet to be developed. Applying the differential game framework, we propose a dynamic budget allocation model in a duopolistic competitive setting. We first examine the steady-state Nash equilibrium policies for the advertisers, and then investigate the optimal paths of open-loop Nash equilibrium. In addition, we provide an algorithm to compute the optimal path of budget policies. Computational experiments were conducted to derive additional managerial insights. One important finding of this study is that the effects of two advertising factors, quality score and potential market revenue, on the steady-state budget levels are non-monotonic. This finding to some extent challenges the commonly-held view that higher quality scores lead to lower optimal advertising expenditures. Another interesting finding suggests that advertisers should set a budget cap even in a competitive environment to avoid the potential risk of over-spending in sponsored search advertising.

Suggested Citation

Yang, Yanwu and Yang, Yinghui (Catherine) and Liu, Dengpan and Zeng, Daniel Dajun, Dynamic Budget Allocation in Competitive Search Advertising (June 1, 2016). Available at SSRN: https://ssrn.com/abstract=2912054 or http://dx.doi.org/10.2139/ssrn.2912054

Yanwu Yang (Contact Author)

School of Management, Huazhong University of Science and Technology ( email )

1037 Luoyu Road
Hubei 430074
China

Yinghui (Catherine) Yang

Graduate School of Management, UC Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616

Dengpan Liu

Tsinghua University, School of Economics and Management ( email )

China

Daniel Dajun Zeng

University of Arizona - Department of Management Information Systems ( email )

AZ
United States

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