Passive internet search∗

Advertisers compete in a market for horizontally differentiated products. Consumers are reached by unsolicited ads while surfing on the internet. Search is passive and searching through ads has no cost because consumers are online to enjoy some content. Delaying a purchase however involves some cost because future surplus is discounted. Clicking on an ad is costly and provides perfect information about the advertised product as well as an opportunity to buy. The market is either in a competitive regime or in a monopoly regime depending on whether click costs are low or high. In the competitive regime, firms advertise only product information, price increases with the click cost and it is lower if the advertised product information is more precise. In the monopoly regime, price is also advertised and decreases as the click cost become larger. Precise targeting may achieve a monopoly regime with complete surplus appropriation by firms even if click costs are low. If ads are solicited and search is active, the consumer’s exclusive purpose on the internet is to purchase a product. As a result, searching through ads is costly. In the competitive regime, firms advertise price information in order to influence the consumers’ search behavior. As a result, prices are lower and the competitive regime prevails for a larger range of click costs, but there is no monopoly regime and precise targeting leads to market unravelling because of a holdup problem.