Working Paper: CEPR ID: DP9828
Authors: Kfir Eliaz; Rani Spiegler
Abstract: Can a competitive market implement an ideal search engine? To address this question, we construct a two-sided market model in which consumers with limited, idiosyncratic vocabulary use keywords to search for their desired products. Firms get access to a keyword if they pay its competitive price-per-click. An underlying "broad match" function determines the probability with which a firm will enter the consumer's search pool as a function of the keyword it "buys" and the consumer's queried keyword. The main question we analyze is whether there exists a broad match function that gives rise to an efficient competitive equilibrium outcome. We provide necessary and sufficient conditions, in terms of the underlying search cost and the joint distribution over consumers' tastes and vocabulary, and characterize equilibrium keyword prices under such equilibria. The Bhattachayyara coefficient, a measure of closeness of probability distributions, turns out to play a key role in the analysis.
Keywords: keywords; search engine; market design; consumer behavior; broad match function
JEL Codes: D43; L86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search costs (s) (D40) | consumer behavior (D19) |
| keyword prices (D44) | consumer welfare (D69) |
| effectiveness of broad match function (b) (C70) | consumer welfare (D69) |
| consumer type distribution (D39) | market implementability of an ideal search engine (D41) |
| Bhattacharyya coefficient (C46) | equilibrium prices of keywords (D41) |
| broad match function (C78) | market equilibrium (D53) |
| broad match function (C78) | consumer welfare (D69) |