To Sponsor or Not to Sponsor: Sponsored Search Auctions with Organic Links

In 2010 sponsored search advertisements generated over $12 billion in revenue for search engines in the US market and accounted for 46% of online advertising revenue. A substantial portion of this revenue was generated by the sale of search keywords using an auction mechanism. We analyze a game-theoretic model to understand the interplay between organic and sponsored links in keyword auctions. Our model allows both the relevance of the advertising firm as well as the position of its sponsored link to impact click-through-rates. Our results demonstrate how the presence of organic links (links generated by the search engine algorithm) may lead to either more or less aggressive bidding for sponsored link positions depending on consumer attitudes toward sponsored links and the extent to which sponsored and organic links are complements or substitutes. In contrast to equilibrium results in existing literature, the firm with the highest value per click does not necessarily win the first spot in the sponsored search listings. It also may be optimal for a firm to bid an amount greater than the expected value (or sale) from a click. ∗Department of Economics, Alfred Lerner College of Business and Economics, University of Delaware, Newark, DE 19716, [email protected] †CREM, University of Rennes 1, France, [email protected]. ‡CREM, University of Rennes 1, France, [email protected].