Research Note - Quality Uncertainty and the Performance of Online Sponsored Search Markets: An Empirical Investigation

Sponsored search mechanisms, where advertisers bid for better placement in the listing of search results on search services such as Yahoo! and Google integrate the benefits of online search with advertising, and 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 not only test some of the predictions of earlier research relating advertiser’s quality and their advertising intensity, in the online setting, but to also examine whether intervention by the search intermediary impacts the performance of these markets. Using data from online sponsored search auctions this study examines whether the relationship between advertisers’ quality and their advertising intensity varies across product categories as well as across the different search mechanisms. Our results highlight significant and interesting differences in the quality-advertising relationships across the two market mechanisms as well as across products characterized by differing degrees of quality uncertainty. *The authors would like to thank the NET institute for generous financial support. This paper has greatly benefited from comments from anonymous reviewers at ICIS 2006, CIST 2006, and participants at the Workshop on Sponsored Search Auctions, Vancouver, CA. We are also grateful to Carolyn Gideon, Sanjay Gosain, Nathan Larson, Ravi Mantena, and the participants at the 2006 NET Institute Conference for their insights and feedback. Danny Jamal provided valuable research assistance.