Online Advertisers’ Bidding Strategies for Search, Experience, and Credence Goods: An Empirical Investigation

The advent of keyword advertising raises many interesting questions regarding consumer search behavior, firms’ advertising strategy, and the ensuing market dynamics. Our research investigates whether advertisers’ bidding strategies for keywords differ across search, experience, and credence product categories, and examines the possible drivers of these differences. In particular, we examine the relationship between advertisers’ quality and their bidding strategies and more importantly, if advertisers’ bidding strategies differ across search, experience and credence goods, characterized by different degrees of qualityuncertainty. We also examine if the advertisers’ valuation for being placed among the top of the search listings is different for advertisers in the search, experience, and credence product categories. Based on data about advertisers’ bids collected from online paid-placement auctions, we find that there are significant differences in the bidding strategies of sellers of search goods as compared to sellers of experience and credence goods, and that there is significant adverse selection in product categories characterized by greater uncertainty. We also find that the relative valuation for premium placement is much higher among advertisers of search goods as compared to advertisers of experience and credence goods. Our findings could be explained by fundamental differences in consumer search behavior as well as the “quality signaling” (or lack thereof) potential of paidplacements across the different product categories. Ongoing research based on lab experiments seeks to systematically examine the possible drivers of differences in valuations across product categories and the implications of our preliminary findings.