Economic analysis of search advertising : price competition, bidding incentive, consumer search, and information structure

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Xu, Lizhen, Ph. D.

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This dissertation performs economic analysis of search advertising from a comprehensive picture of the competition facing advertisers---by incorporating the price competition to endogenously investigate advertisers' bidding incentive, and taking into account consumers' online search and the unique information structure associated with the search advertising format. It consists of three essays based on game-theoretic modeling. The first essay studies the oligopolistic price competition among advertisers placed in different advertising positions, considering distinctive features of consumers’ online search behaviors. We find an interesting local-competition pattern in which direct price competition occurs only between advertisers adjacent to each other. The second essay integrates the price competition into the bidding competition and investigates the endogenous bidding incentives of advertisers with different competitive strengths. Surprisingly, we find that an advertising position with a better exposure may not always be profitable for the advertisers with competitive advantage, even if it is cost free. We also show that the bidding outcome might not align with the relative competitive strength. The third essay further considers the effects of organic listing as a competing information source on the sponsored bidding competition and the outcome performances in search advertising. It provides answers to questions such as whether and why advertisers with sufficient exposure from the organic list may still be willing to bid for top sponsored positions, and how the existence of organic listing affects search engine’s revenue, consumer surplus, and social welfare.



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