Competitive Poaching in Sponsored Search Advertising and Its Strategic Impact on Traditional Advertising

An important decision for a firm is how to allocate its advertising budget among different types of advertising. Traditional advertising, such as advertising on television and in print, serves the purpose of building consumer awareness and desire about the firm’s products. With recent developments in technology, sponsored search (or paid search) advertising at search engines in response to a keyword searched by a user has become an important part of most firms’ advertising efforts. An advantage of sponsored search advertising is that, since the firm advertises in response to a consumer-initiated search, it is a highly targeted form of communication. Therefore, the salesconversion rate is typically higher than in traditional advertising. However, a consumer would search for a specific product or brand only if she is already aware of the same due to previous awareness-generating traditional advertising efforts. Moreover, competing firms can use sponsored search to free-ride on the awareness-building efforts of other firms by directly advertising on their keywords and therefore “poaching” their customers. Anecdotal evidence shows that such poaching is a frequent occurrence. In other words, traditional advertising builds awareness, while sponsored search is a form of technology-enabled communication that helps to target consumers in a later stage of the purchase process, which induces competitors to poach these potential customers. Using a game theory model, we study the implications of these tradeoffs on the advertising decisions of competing firms, and on the design of the sponsored search auction by the search engine. We find that symmetric firms may follow asymmetric advertising strategies, with one firm focusing on traditional advertising and the other firm focusing on sponsored search with poaching. Interestingly, the search engine benefits from handicapping poaching, i.e., it benefits from discouraging competition in its own auctions. This intriguing result explains why search engines such as Google, Yahoo! and Bing use “keyword relevance” scores to under-weight the bids of firms bidding on competitors’ keywords. We also obtain various other interesting insights on the interplay between sponsored search advertising and traditional advertising.