Search Engine Advertising: Channel Substitution When Pricing Ads to Context

We explore substitution patterns across advertising platforms. Using data on the advertising prices paid by lawyers for 139 Google search terms in 195 locations, we exploit a natural experiment in ―ambulance-chaser‖ regulations across states. When lawyers cannot contact clients by mail, advertising prices per click for search engine advertisements are 5-7% higher. Therefore, online advertising substitutes for offline advertising. This substitution towards online advertising is strongest in markets with fewer customers, suggesting that the relationship between the online and offline media is mediated by the marketers’ need to target their communications. * Avi Goldfarb is Associate Professor of Marketing, Rotman School of Management, University of Toronto, 105 St George St., Toronto, ON. Tel. 416-946-8604. Email: [email protected]. Catherine E. Tucker is Assistant Professor of Marketing, MIT Sloan School of Business, 1 Amherst St., E40-167, Cambridge, MA. Tel. 617-252-1499. Email: [email protected]. We wish to thank Jayne Huang for excellent research assistance. We also wish to thank the review team, Chris Dellarocas, Shane Frederick, Anindya Ghose, Shane Greenstein, and seminar participants at SCECR 2007, LBS, the NET Institute conference (2008), the Fourth Workshop on Ad Auctions, and the University of Toronto for comments. We thank the NET Institute (http://www.NETinst.org) for financial support.