A "Position Paradox" in Sponsored Search Auctions
Coauthor(s): Liye Ma, Young-Hoon Park, Kannan Srinivasan.
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We study the bidding strategies of vertically differentiated firms that bid for sponsored search advertisement
positions for a keyword at a search engine. We explicitly model how consumers navigate and click on
sponsored links based on their knowledge and beliefs about firm qualities. Our model yields several interesting
insights; a main counterintuitive result we focus on is the "position paradox." The paradox is that a superior
firm may bid lower than an inferior firm and obtain a position below it, yet it still obtains more clicks than
the inferior firm. Under a pay-per-impression mechanism, the inferior firm wants to be at the top where more
consumers click on its link, whereas the superior firm is better off by placing its link at a lower position because
it pays a smaller advertising fee, but some consumers will still reach it in search of the higher-quality firm.
Under a pay-per-click mechanism, the inferior firm has an even stronger incentive to be at the top because
now it only has to pay for the consumers who do not know the firms' reputations and, therefore, can bid more
aggressively. Interestingly, as the quality premium for the superior firm increases, and/or if more consumers
know the identity of the superior firm, the incentive for the inferior firm to be at the top may increase. Contrary
to conventional belief, we find that the search engine may have the incentive to overweight the inferior firm's
bid and strategically create the position paradox to increase overall clicks by consumers. To validate our model,
we analyze a data set from a popular Korean search engine firm and find that (i) a large proportion of auction
outcomes in the data show the position paradox, and (ii) sharp predictions from our model are validated in
Source: Marketing Science
Jerath, Kinshuk, Liye Ma, Young-Hoon Park, and Kannan Srinivasan. "A 'Position Paradox' in Sponsored Search Auctions." Marketing Science 30, no. 4 (2011): 612-627.