Paid Placement: Advertising and Search on the Internet

Abstract

Paid placement, where advertisers bid payments to a search engine to have their products appear next to keyword search results, has emerged as a predominant form of advertising on the Internet. This paper studies a product-differentiation model where consumers are initially uncertain about the desirability of and valuation for different sellers' products, and can learn about a seller's product through a costly search. In equilibrium, a seller bids more for placement when his product is more relevant for a given keyword, and the paid placement of sellers by the search engine reveals information about the relevance of their products. This results in efficient (sequential) search by consumers and increases total output.

Keywords: Paid placement, Advertising, Auction, E-commerce, Search