The Impact of Sponsored Listings on Online Marketplaces: Insights from a Field Experiment

Abstract

Advertising on e-commerce marketplaces, wherein sponsored product listings are interleaved with organic product listings in the search results, is a large and growing phenomenon. In this paper, taking the perspective of the marketplace, we obtain insights into the impact of sponsored listings being shown at the most salient positions in the list of results. To do so, we analyze data from a large-scale field experiment at Flipkart, a leading online marketplace in India. We find nuanced results that substantially vary across categories. In the Electronics category, the sponsored listings perform worse (in terms of clicks and conversions) than the organic listings that they replace, whereas the organic listings in the neighborhood of the sponsored listings perform better than in the absence of the sponsored listings. Surprisingly, these effects are reversed in the Clothing and Footwear categories, where the ads perform better than the displaced organic listings, suggesting that sponsored listings might help the platform identify new high-relevance products and improve search rankings for these categories. However, at the search level, because of the countervailing impacts on sponsored listings and neighboring organic listings (even though the directions of these effects are different for different categories), we find that increasing the fraction of sponsored listings (by about 10% points) has no effect on clicks and conversions in any product category. This implies that ads bring in additional revenue for the marketplace yet do not hurt overall consumer response (in the short run). We theorize that the variation across categories occurs due to differing degrees of information asymmetry on product relevance to a query between the marketplace and the independent sellers of listed products, and provide supporting evidence for this mechanism.

Keywords: E-commerce platforms; Advertising, Sponsored search; Third-party sellers; Asymmetric information; Product heterogeneity

JEL Classification: M31, M37, L81, D82, D83, C93