Essays in online search advertising
Abstract
Search advertising, which is advertising shown alongside online search results presented by search engines such as Google, is a rapidly growing form of online advertising today. Unlike traditional media advertising, which is typically sold on the basis of audience demographics, search advertising is sold on the basis of the keyword chosen by the consumer at a search engine website. Moreover, search advertising is sold through an auction of keyword phrases to interested bidders. In this dissertation, we study interesting problems posed to the stakeholders in this industry, search engines, which display the advertising in exchange of advertisers' payments, and advertisers, which feature their ads in search engines' website. In the first essay, we study advertisers' decision problems about how media planners should incorporate this advertising vehicle in their decision-making. In choosing traditional advertising media, firms typically use the media vehicles that are the most effective in generating the desired consumer outcomes. Frequently, firms use measures such as cost-per-thousand (CPM) reached to compare different traditional media. However, the question arises as to whether such measures can translate seamlessly to search advertising. In other words, would the CPM available to a media planner from traditional media become the threshold for deciding whether a firm should participate in search advertising or in deciding how much the advertiser should bid? In this paper, we analyze this critical issue using a model of vertically differentiated competing firms in which the firms make decisions on coordinating traditional media and search advertising. We find interestingly that a firm should not use the CPM it incurs in traditional media to decide if it is worth spending on online search advertising. Indeed, we find that a firm may undertake search advertising even if the minimum bid needed to be featured by the search engine exceeds the CPM in traditional media vehicles. The reason for this interesting result is because of the strategic benefits firms expect to derive from undertaking search advertising. The firm can derive strategic benefits by pre-empting competitors in expanding the awareness through search advertising, even if the cost per customer's click in this media exceeds the CPM in traditional media. On the other hand, the firm may also derive strategic benefits by raising competitors' costs for a keyword even if it loses the auction for the keyword in search advertising. However, we also find that the pursuit of these strategic benefits can results in a prisoner's dilemma in which the firms' profits are decreased with search advertising. In the second essay, we study search engines' decision problem related to the design of the generalized second price auction: how should a search engine strategically decide on the number of advertising slots? To answer this question, we analyze the implication of varying the number of slots in a base model in which the click-through rates are assumed to be independent of the number of slots. When deciding the number of slots, we find that a search engine's profit is based on two counteracting factors: the incremental clicks from an extra slot and the influence of the extra slot on advertisers' payments per click. Our analysis characterizes the conditions for optimality of the number of slots and the implications of different distributions for advertiser-valuations. We also extend the base model to allow for attraction and cannibalization of clicks from existing slots by new ad slots and show how such effects affect the optimal number of slots. Our overall results show that search engines need to optimize the number of ad slots offered for auction in order to maximize profit.
Degree
Ph.D.
Advisors
Balachander, Purdue University.
Subject Area
Marketing
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