Quality Uncertainty And Adverse Selection In Online Sponsored-Search Markets

Sponsored-search mechanisms, where advertisers bid for better placement in the listing of search results on Yahoo! and Google, have emerged as the dominant revenue model for online search engines. Interestingly, Yahoo! and Google employ different mechanisms to determine the placement of bidders’ advertisements. This provides an unprecedented opportunity to extend the research relating quality and advertising in traditional markets to the online setting, and also examine whether intervention by the search intermediary impacts the outcomes observed in these markets. Using data from online sponsored-search auctions, we examine the relationship between advertisers’ quality and their advertising-intensity, indicated by their willingness to pay for search listings. We assess how this relationship differs across search, experience, and credence products characterized by differing degrees of quality uncertainty as well as across the two markets. We find significant differences in the quality-advertising relationships across the three product categories as well as across the two market mechanisms. We discuss the implications of our findings for consumers as well as intermediaries, and provide directions for future research in this emerging context.