What Makes them Click: Empirical Analysis of Consumer Demand for Search Advertising∗

We study users’ response to sponsored-search advertising using data from Microsoft’s Live AdCenter distributed in the “Beyond Search” initiative. We estimate a structural model of utility maximizing users, which quantifies “user experience” based on their “revealed preferences,” and predicts user responses to counterfactual ad placements. In the model, each user chooses clicks sequentially to maximize his expected utility under incomplete information about the relevance of ads. We estimate the substitutability of ads in users’ utility function, the fixed effects of different ads and positions, user uncertainty about ads’ relevance, and user heterogeneity. We find substantial substitability of ads, which generates large negative externalities: 50% more clicks would occur in a hypothetical world in which each ad faces no competition. As for counterfactual ad placements, our simulations indicate that CTR-optimal matching increases CTR by 15% while user-optimal matching increases user welfare by 25% (and neither coincides with assortative matching). Moreover, targeting ad placement to specific users could raise user welfare by 60%. Finally, user welfare could be raised nearly 15% if they had full information about the relevance of ads to them. ∗The authors are grateful to Microsoft Corp. for providing the data and computing facilities and hosting them during the summer of 2008. The second author also acknowledges the support of the Toulouse Network for Information Technology. †Graduate School of Business, Stanford University, Stanford CA 94305 ‡Department of Economics, Stanford University, Stanford CA 94305