Search Advertising: Budget Allocation Across Search Engines

In this paper, we investigate advertisers’ budgeting and bidding strategies across multiple search platforms. Our goal is to characterize equilibrium allocation of a limited budget across platforms and draw managerial insights for both search engines and advertisers. We develop a model with two search engines and budget-limited advertisers who compete to obtain advertising slots across search platforms. We find that the degree of asymmetry in advertisers’ total budgets determines the equilibrium budget allocations. In particular, when advertisers are symmetric in their total budgets, they pursue asymmetric allocation strategies and partially differentiate: one advertiser allocates a higher share of its budget to one of the search engines, and the other allocates the same higher share of its budget to the other search engine. This partial differentiation in budget allocation strategies occurs when two forces are balanced: a demand force arising from a desire to be present on both platforms in order to obtain a greater number of clicks, and a strategic force driven by a desire to be dominant on at least one platform in order to obtain clicks at a lower cost. Thus budget allocation is a balancing act between getting more clicks and keeping costs low. When advertisers have highly asymmetric budgets, however, the second force is absent since the low-budget advertiser cannot dominate either platform. In this case, we find that the unique equilibrium for the advertisers is to allocate their budgets proportional to the traffic of each platform.