To Score or Not to Score? Estimates of a Sponsored Search Auctions Model

We estimate a structural model of sponsored search auctions at “Website X”, one of the largest online marketplaces in China. We use the estimates to address the distributional and revenue impact of “scoring” the auction, which is a way for shopping websites to reward larger merchants (by penalizing smaller merchants). We find evidence of horizontal differentiation in preferences, as merchants of different qualities differ in their valuations of ad positions. Counterfactual evaluations show that the price trend becomes steeper after moving to a score-weighted generalized second price auction, with much higher prices obtained for the top position but lower prices for the other positions. Overall there is only a very modest change in total revenue from introducing popularity scoring, despite the intent in bid scoring to reward popular merchants with price discounts.