Essays on search, search engine and search -based advertising

Liang Yu, Purdue University

Abstract

This thesis consists of two essays analyzing related topics. The first essay investigates the role of search cost in electronic markets. It is the first to introduce product specificity to a search model which allows us to study both short term and long term effects of reducing search cost. It shows that in a search model with product specificity, when search cost drops, in the short run, equilibrium price will drop. However, in the long run, sellers will increase product specificity, the equilibrium price might rise, and profits for sellers might increase as well. Overall, reducing search cost increases social welfare. This model partially explains the empirical findings that can not be explained by the existing search models and supports the observation that we now have more diversified products available. The second paper “Search Engine and Search-based Advertising” explores the interaction between a search engine and the heterogeneous product market it serves. The search engine builds indexes so that consumers might find some information about firms even when the firms do not advertise. The search engine charges fees to consumers who want to search and to firms that want to advertise. The reach of a search engine, and the advertising and search decisions directly impacts the competitiveness of the product market, which in turn affects the willingness of consumers and firms to use the search engine. Our main findings include: the subscription fees are set very low to induce full consumer participation; the search engine improves social welfare by enhancing matching, enlarging markets and improving competition; the advertised price is lower than the non-advertised price when some consumers do not use search engine. The advertised price and non advertised price are equal to each other when all consumers use the search engine. We also compare two pricing mechanism of search engine, auction and posted price.

Degree

Ph.D.

Advisors

Chaturvedi, Purdue University.

Subject Area

Management|Business costs

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