Advertising on Online Marketplaces: Information Asymmetry and the Relevance of Sponsored Listings

42 Pages Posted: 4 Aug 2017 Last revised: 17 Dec 2019

See all articles by Vibhanshu Abhishek

Vibhanshu Abhishek

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Kinshuk Jerath

Columbia University - Columbia Business School

Siddhartha Sharma

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Date Written: December 15, 2019

Abstract

Advertising on e-commerce marketplaces, wherein sponsored product listings are interleaved with organic product listings, is a large and growing phenomenon. In this paper, we both theoretically and empirically study whether including sponsored listings improves or hurts the overall quality and relevance of the set of products displayed to consumers. Our theoretical analysis reveals that the relevance of the ads to the consumers' search queries depends on the level of information asymmetry between the marketplace owner and the sellers who sell products with different degrees of relevance. Specifically, when information asymmetry is low (high), i.e., the platform can (cannot) easily distinguish between high- and low-relevance sellers, then low-relevance (high-relevance) sellers have a greater incentive to advertise. However, even when low-relevance products are displayed as ads, consumers end up finding well-matching products as long as search and evaluation costs are reasonable; therefore, the overall impact on sales is relatively small while the marketplace benefits from the additional revenue from selling ads. We obtain data from a large-scale field experiment run at Flipkart, a leading online marketplace in India, and find that various empirical patterns implied by our theoretical results hold in the data. Our study provides several practical implications for managers of online marketplaces.

Keywords: E-commerce, Sponsored Search, Advertising, Product Heterogeneity, Platform, Asymmetric Information

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

Suggested Citation

Abhishek, Vibhanshu and Jerath, Kinshuk and Sharma, Siddhartha, Advertising on Online Marketplaces: Information Asymmetry and the Relevance of Sponsored Listings (December 15, 2019). Available at SSRN: https://ssrn.com/abstract=3013468 or http://dx.doi.org/10.2139/ssrn.3013468

Vibhanshu Abhishek

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

Kinshuk Jerath

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Siddhartha Sharma (Contact Author)

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

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