Working Paper: CEPR ID: DP17401
Authors: Massimo Motta; Antonio Penta
Abstract: We investigate the market effects of brand search advertising, within a model where two firms simultaneously choose the price of their (differentiated) product and the bids for the advertising auction which is triggered by own and rival's brand keywords search; and where there exist sophisticated/attentive consumers (who look for any available information on their screen) and naive/inattentive consumers (who only look at the top link of their screen), both aware of either brand's characteristics and price.Relative to a benchmark where only organic search exists, in any symmetric equilibrium each firm wins its own brand auction, and advertising has detrimental effects on welfare: (i) the sponsored link crowds out the rival's organic link, thus reducing competition and choice, and leading to price increases; (ii) the payment of the rival's bid (may) raise marginal cost, also contributing to raise market prices. Under extreme asymmetry (there is an incumbent and an unknown new entrant), we do find that the market effect of brand bidding might be beneficial, if the search engine does not list the entrant's link in organic search, and the share of the sophisticated consumers in the economy is large enough for an equilibrium in which the entrant wins the advertising auction on the search for the incumbent's brand to exist.
Keywords: online advertising; auctions; oligopoly; search engines; brands; horizontal agreements
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Winning a brand auction (D44) | Reduced competition (L49) |
| Reduced competition (L49) | Higher prices (D49) |
| Presence of a sponsored link (M37) | Reduced visibility of rival offerings (L15) |
| Reduced visibility of rival offerings (L15) | Higher prices (D49) |
| Auction payment (D44) | Increased marginal costs (D40) |
| Increased marginal costs (D40) | Higher prices (D49) |
| Brand bidding under extreme asymmetry (D44) | Beneficial market effects (G19) |