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: