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K INSHUK J ERATH (CMU) L IYE M A (U NIV. OF M ARYLAND ) Y OUNG -H OON P ARK (C ORNELL ) K ANNAN S...
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Transcript of K INSHUK J ERATH (CMU) L IYE M A (U NIV. OF M ARYLAND ) Y OUNG -H OON P ARK (C ORNELL ) K ANNAN S...
KINSHUK JERATH (CMU)LIYE MA (UNIV. OF MARYLAND)YOUNG-HOON PARK (CORNELL)
KANNAN SRINIVASAN (CMU)
MARKETING SCIENCE (2011), 30(4), 612–627
A “Position Paradox” in Sponsored Search Auctions
Executive Summary
For a list of sponsored ads in response to a keyword search on a search engine, consumer click behavior depends not only on the ranks of the ads, but also on the comparative quality of the firms in the list
An important implication for sponsored search auctions is the “position paradox” A configuration of the sponsored list in which a inferior-quality firm bids
more than a superior-quality firm, is placed at a higher position, yet receives fewer clicks
Key managerial takeaways Getting a lower rank can be more profitable for the superior-quality firm Getting a higher rank at a higher price can be more profitable for an inferior-
quality firm even if many (most!) customers realize it is of inferior quality and do not purchase from it
Search engine may strategically overweight inferior-quality firm’s bid—opposite to conventional belief
Sponsored Search Advertising
Reputed sellers such as Zales and Tiffany are located below lesser-known sellers such as Adiamor.com, Brillance.com and
B2CJewels.com
This pattern occurs consistently for many keywords, and is verified in larger-scale data
Superior-quality sellers can have an incentive to position themselves lower in the list of
sponsored ads compared to inferior-quality sellers.
Why?
low quality
high quality
Key Insight
Consumers process the sponsored list to search for their ideal product/service Search is costly because it involves clicking the link and reading and
understanding the web page describing the product or service
Firms’ bids should depend on the profit difference from gaining/losing a position, which depends on quality differential between firms and the search cost of consumers
These effects combine to give the position paradox in which one firm bids more than the other and is placed at a higher position, yet receives fewer clicks Lower positions preferred by superior-quality firms because the firm pays
a low price, while consumers will reach in search of better product/service Higher positions preferred by inferior-quality firms even at a higher price
because at lower position they will not get enough consumers as search is costly
More on the Position Paradox
Found when search cost to process the list of sponsored ads is significant but not too large
Robust to different auction mechanisms, such as pay-per-impression and pay-per-click
When the superior firm has a higher quality premium, the inferior firm is more likely to be at a higher position
When the superior firm has a more widespread reputation, the inferior firm is more likely to be at a higher position
Robust phenomenon in data—found in more than 25% cases in data from a Korean search engine
Implications for the Search Engine
The position paradox configuration leads to more consumer clicks (because consumers do not find the superior-quality firm at the top, so search for it at lower positions)
In a pay-per-click auction, the search engine wants to increase total number of clicks to obtain more revenue, and thus has the incentive to create the position paradox configuration
The search engine has the incentive to over-weight (i.e., artificially increase using a multiplier) the bid of the inferior firm so that it gets placed higher Contrary to typical belief (that search engines only over-weight bids of the
superior firms)
Summary and Conclusions
Consumer click behavior in a sponsored list depends significantly on the comparative quality of the firms in the list and consumer click/search cost
This generates the “position paradox” under certain conditions Inferior-quality firm bids more than superior-quality firm and is placed at a
higher position, yet receives fewer clicks. Alternatively stated, superior-quality firm bids lower than inferior-quality firm and is placed at a lower position, yet receives more clicks
Larger quality premium and widespread consumer knowledge for the superior-quality firm makes the inferior-quality firm more likely to be placed on top
Key managerial takeaways Getting a lower rank can be more profitable depending on quality Search engine may strategically overweight inferior-quality firm’s bid—
opposite to conventional belief
EXTRA SLIDES:ILLUSTRATION WITH A GAME-
THEORY MODEL
(Please see paper for complete details)
Assumptions of Model
Two quality-differentiated firms bid to be placed on a list of sponsored ads in response to a consumer keyword query
Consumers All consumers know firms are quality differentiated.
However, Informed consumers know the identity of the higher-quality firm Uninformed consumers don’t know the identity of the higher-quality
Consumers navigate through the list in search of high-quality product, and incur a search cost on clicking on an ad
Consumers also have a subjective preference due to which they may not like a high-quality product
Firms consider how consumers will navigate through the list before purchasing the product
Formalizing the Model
Two quality differentiated firms bidding for position “Inferior”, net value to consumer: V>0 “Superior”, net value to consumer: V+Q, Q>0 The superior firm’s margin is higher: mS>mI>0
Consumers “Informed”, size 0<φ<1: directly click on superior firm “Uninformed”, size 1–φ: start searching from the top
Search cost: s>0 per click
“Match” probability of subjective preference: 0<p<1
Auction setup: pay-per-impression and pay-per-click
Illustration of Position Paradox (1) Scenario: Medium Search Cost (pV<s<pQ)
If superior firm on top If inferior firm on top
Click superior firm
Match(p)
Buy atsuperior
No match(1-p)
QuitpV < s
Uninformed consumers’ navigation:
Informed consumers’ navigation (does not depend on positions of firms):
Click superior firm
Match(p)
Buy atsuperior
No match(1-p)
QuitpV < s
Click inferior firm
MatchNo match
Click superior firm
MatchNo match
Buy atsuperior
Quit
Click superior firms < pQ
MatchNo match
Buy atsuperior
Buy atinferior
Illustration of Position Paradox (2) Scenario: Medium Search Cost (pV<s<pQ)
Based on relative sizes of informed and uninformed consumers, and their navigation patterns (on previous slide), the revenues of the firms at different positions are: