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Working Paper

Competitive Poaching in Sponsored Search Advertising and Its Strategic Impact on Traditional Advertising

Amin Sayedi, Kinshuk Jerath, and Kannan Srinivasan , 2012 [12-110]

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Sponsored search (or paid search) advertising at search engines has become an important part of most firms’ advertising efforts. An advantage of sponsored search advertising is that, since the firm advertises in response to a consumer-initiated keyword search, it is a highly targeted form of communication. Therefore, the sales-conversion rate is typically higher than in traditional advertising. However, a consumer would search for a specific product or brand only if he or she is already aware of the same due to previous awareness-generating traditional advertising efforts (such as television or print).

Moreover, competing firms can use sponsored search to free-ride on the awareness-building efforts of other firms by directly advertising on other firms’ keywords and “poaching” their customers. In other words, traditional advertising builds awareness, while sponsored search helps to target consumers in a later stage of the purchase process, which induces competitors to poach these potential customers. Anecdotal evidence shows that such poaching is a frequent occurrence. Thus, advertisers must trade-off the advantages of sponsored search with the disadvantages of competitor poaching.

The authors study the implications of this tradeoff on the advertising decisions of competing firms and on the design of the sponsored search auction by the search engine. They develop theoretical insights using the tools of game theory, and offer supportive empirical and anecdotal evidence.

They find that poaching increases the per-customer acquisition cost through sponsored search as it leads to increased competition for keywords on which competitors want to free-ride. This increase in costs makes sponsored search less attractive as an advertising channel for firms. Interestingly, the authors find that similar firms may follow different advertising strategies in response to each other, with one firm focusing on traditional advertising and another firm focusing on sponsored search with poaching.

An important managerial implication of this result is that when a marketing manager is planning to start a large traditional advertising campaign for a product, he or she should anticipate higher prices in the sponsored search channel for the new search volume created (due to the advertising campaign) because competitors will increase poaching. Furthermore, the managers should respond to this poaching, not by spending more on sponsored search, but by shifting more resources to traditional advertising to keep competition under check. Although this implies accommodating poaching by the competitor, it allows the firm to generate more direct sales from traditional advertising, rather than paying high sponsored search prices.

The authors show that the search engine benefits from “handicapping poaching,” i.e., from discouraging, though not completely eliminating, competition in its own auctions. Handicapping poaching keeps prices for keywords in sponsored search in check and limits shifting of advertising dollars to other channels. This intriguing result explains why search engines such as Google, Yahoo! and Bing allow poaching, but at the same time use “keyword relevance” scores to under-weight the bids of firms bidding on competitors’ keywords.

Amin Sayedi is Assistant Professor of Marketing, University of North Carolina at Chapel Hill. Kinshuk Jerath is Assistant Professor of Marketing, Carnegie Mellon University. Kannan Srinivasan is H.J. Heinz II Professor of Management, Marketing and Information Systems and Rohet Tolani Distinguished Professor in International Business, Carnegie Mellon University.

Acknowledgment

The authors thank seminar participants at Columbia University, Dartmouth College, New York University, Harvard University, University of North Carolina at Chapel Hill, University of Florida, University of Pennsylvania, University of Southern California, Yale University, and at the Marketing Science Conference 2011, for their feedback. The authors also thank Marketing Science Institute for supporting this research through MSI Research Grant #4-1719, as one of the winners of the “Communication and Branding in a Digital Era” research competition.

Included in the following collections:
Consumer Click Behavior at a Search Engine: The Role of Keyword Popularity

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