Executive Summary
This article presents a design of a major method that search engines use to sell keyword advertising inventories. Keyword advertising begins with sites such as Google, Yahoo, and others providing “sponsored links” or targeted text advertisements alongside search results to consumers who signal their interests through their search keywords. Online technologies enable not only a better alignment of advertisements with consumers’ interests but also innovative performance metrics (e.g., pay-per-click) unavailable to traditional advertising. Keyword advertising has quickly grown into a multibillion-dollar market. Keyword advertising providers, such as Google, Yahoo, and MSN, typically auction keywords to advertisers. Advertisers choose keywords to bid on, and as they bid higher prices, they typically get larger shares of the total advertising inventories—that is, their advertisements are shown more often and in a more prominent position.
The authors study the following problem: Of the total available inventories for each keyword, how large a percentage should be dedicated to the highest bidder, to the second-highest bidder, and so on? Such a problem has increasing importance as keyword advertising grows beyond its original form. Advertising providers already use the same technology to provide keyword advertising to nonsearch sites that match their content. For example, Google serves keyword advertising to hundreds of thousands of online publishers, from major social network sites to personal blogs, through its AdSense network. Advertising providers have also introduced image and video advertisements and have extended their services to mobile, radio, and print media.
The results of this study show that the best way to divide the available advertising inventories depends on several factors, including advertisers’ demand elasticity, total available inventories, the distribution of advertisers’ willingness to pay, and minimum bids. For example, if advertisers’ demand is perfectly elastic, advertising providers should dedicate as much as possible to the highest-paying advertisers. As advertisers’ demand becomes less elastic, advertising providers should dedicate less to high-paying advertisers and more to the low-paying ones. This research highlights the need to actively manage the allocation of total inventories according to the underlying demand and supply characteristics. The results may also have implications for the selling of network bandwidth, grid-computing power, television broadcasting rights, and digital billboard advertising, which, similar to keyword advertising, are divisible and capacity constrained.
Biography
Jianqing Chen is Assistant Professor in Information Systems in Haskayne School of Business at the University of Calgary. He received his PhD from the McCombs School of Business at the University of Texas at Austin in 2008. His general research interests are in electronic commerce, economics of information systems, and supply chain management. His current research focuses are (1) mechanism design for online auctions and resource allocation, (2) online advertising and pricing, and (3) reputation and moderation systems. His work has been published or has been accepted for publication in academic journals, including Information Systems Research, Decision Support Systems, and Economics Letters.
De Liu is Assistant Professor of Information Systems at the University of Kentucky. His research interests include advertising auctions, consumer contests, and knowledge sharing networks. His recent work has appeared in Information Systems Research, Journal of Marketing, and Decision Support Systems. He received his PhD in Information Systems from the University of Texas at Austin in 2004.
Andrew B. Whinston is Hugh Cullen Chair Professor in Business Administration in the McCombs School of Business at the University of Texas at Austin. He is also the director at the Center for Research in Electronic Commerce. His recent work has appeared in Management Science, Information Systems Research, Journal of Marketing, Marketing Science, and Journal of Economic Theory. In total, he has published more than 300 articles in the major economic and management journals and has authored 25 books. In 2005, he received the Leo Award from the Association for Information Systems for his long-term research contribution to the information system field.
Journal of Marketing, Volume 73, Number 4, July 2009
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