Buying and Selling Traffic: The Internet as an Advertising Medium

The Internet is rapidly growing as a marketing medium. This year online advertising expenditures will reach approximately $20 billion in the US alone. Two formats dominate online advertising: (i) Web sites buying advertising links from each other and (ii) search engines selling sponsored links on their results pages. The first part of the dissertation studies the former advertising model and investigates the network structure that emerges from advertising links. In a world in which consumers ‘surf’ the WWW, Web sites’ revenues originate from two sources: the sales of content (products and services) to consumers, and the sales of links (traffic) to other sites. In equilibrium, higher content sites tend to purchase more advertising links, mirroring the Dorfman-Steiner rule. Sites with higher content sell fewer advertising links and offer these links at higher prices. Thus, sites seem to specialize in terms of revenue models: high content sites tend to earn revenue from sales of content, whereas low content sites tend to earn revenue from sales of traffic (advertising). I test these findings in a variety of empirical studies. The second part of the dissertation explores the other dominant form of online advertising: paid placement. Here, a search engine auctions sponsored links next to the search results. Advertisers submit bids for the price that they are willing to pay for a click. The model focuses on two key characteristics of this problem: (i) the interaction between the search list and the list of sponsored links and (ii) the dynamic forces that influence bidding behavior when sites compete for the sponsored links over time. The findings explain the seemingly random order of sites on the sponsored links list and their variation over time. The results have important managerial implications for both sellers and buyers of online advertising.