Working Papers

A Dynamic Model of Sponsored Search Advertising

Song Yao and Carl Mela

Jan 1, 2009

Develops a modeling framework to explore how search engine marketing strategy affects the behavior of consumers who use the site and advertisers that market there. The model is estimated using data from a search engine. The authors find that (1) 10 percent of searchers do 90 percent of clicks, (2) enabling advertisers to bid by key word and market segment leaves the search engine, advertiser, and consumer all better off, and (3) search tools, though leading to lower profits for the advertiser, enhance the profits to the website and utility to the consumers. More generally, the paper is the first empirical research to consider the entire network of advertisers, consumers and the search engine.

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