Search Engine Advertising: Pricing Ads to Context

We explore how the ability to target ads affects substitution patterns across advertising platforms. Using data on the advertising prices paid by lawyers for 139 Google search terms in 195 locations, we exploit a natural experiment in “ambulance-chaser” regulations across states. When lawyers cannot contact clients by mail, making targeting customers offline harder, advertising prices per click for search engine advertising are 10-16% higher. However, this substitution between offline and online advertising occurs only for rarely-used search terms. This suggests that an advertising platform's ability to profit from targeting depends on both the difficulty of targeting through other means and the number of potential customers for that particular advertising message. Avi Goldfarb is Associate Professor of Marketing, Rotman School of Management, University of Toronto, 105 St George St., Toronto, ON. Tel. 416-946-8604. Email: [email protected]. Catherine E. Tucker is Assistant Professor of Marketing, MIT Sloan School of Business, 1 Amherst St., E40-167, Cambridge, MA. Tel. 617-252-1499. Email: [email protected]. We wish to thank Jayne Huang for excellent research assistance. We also wish to thank Chris Dellarocas, Shane Frederick, Anindya Ghose, Shane Greenstein, and seminar participants at SCECR 2007, LBS, the NET Institute conference (2008), the Fourth Workshop on Ad Auctions, and the University of Toronto for comments. We thank the NET Institute (http://www.NETinst.org) for financial support.