A "Position Paradox" in Sponsored Search Auctions
Presentation
Based on Marketing Science article Jerath, Kinshuk, Liye Ma, Young-Hoon Park and Kannan Srinivasan (2011), "A 'Position Paradox' in Sponsored Search Auctions," Marketing Science, Vol. 30, No. 4, 612-627
Teaching Objective
The objective is to understand how firms should bid to be placed in a list of sponsored ads on a search engine, recognizing that consumers click behavior depends on the qualities of the advertised products/services, in addition to the ranks of the ads. We find a "position paradox" where the low-quality firm prefers to bid to be placed above the high-quality firm, even while receiving fewer clicks, while the high-quality firm prefers to be placed at a lower position. Interestingly, the search engine has the incentive to create the position paradox by over-weighting the bid of the low-quality firm.
Keywords: sponsored search advertising, search cost. vertical differentiation, bidding strategy, pay per impression, pay per click