The Company That You Keep: When to Buy a Competitor's Keyword

In search advertising, we observe different patterns of branded keyword purchase behavior by the brand owner and its competitor. In particular, under a specific branded keyword, we may observe in the sponsored link, only the brand owner, only the competitor, both, or neither. In this paper, we aim to understand their strategies in a competitive environment. We first derive conditions for each purchase pattern to emerge as an equilibrium. On probing further the underlying incentives, we find that in some cases, the brand owner may buy its own keyword only to defend itself from the competitor’s threat. In contrast, we also identify the case where the brand owner chooses to buy its own keyword and precludes the competitor from buying it. Our result also implies that both firms may be worse off by engaging in advertising, as in the prisoner’s dilemma case. Finally, we propose an analysis on the impact of the insufficient advertising budget. If the budget is limited, both firms may have an incentive to hurt the competitor taking the higher slot, by increasing the bid amount and thus quickly exhausting the competitor’s budget. Additionally, the budget constraint may make it less likely for each firm to buy the keyword in equilibrium.