Sponsored Search in Equilibrium: Evidence from Two Experiments

Abstract

Advertising affects not only the firm that advertises, but also the platform that hosts the advertisement. Using data from a field experiment at an e-commerce platform, I demonstrate that the effects on the advertising firm and the hosting platform can differ sharply. The experiment blocks all sponsored search advertising for a small fraction of site visitors. Compared to users who are shielded from ads, users who see ads spend significantly more on sponsored listings and significantly less on organic listings. The second effect dominates, revealing that on net, sponsored search reduces total sales on the platform. Using a separate natural experiment, I also find evidence that sponsored search puts upward pressure on prices, which can exacerbate cannibalization. Together, these findings illustrate the cost of advertising from the perspective of the platform.

Keywords: Sponsored Search, Spillovers, Two-sided markets

JEL Classification: M37, D62, L11