Research Note—Quality Uncertainty and the Performance of Online Sponsored Search Markets: An Empirical Investigation
Animesh Animesh,
Vandana Ramachandran,
Siva Viswanathan
Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada
David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112
Decision, Operations, and Information Technologies, Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742
animesh.animesh{at}mcgill.ca
vandana.ramachandran{at}business.utah.edu
sviswana{at}rhsmith.umd.edu
Online sponsored search advertising has emerged as the dominant online advertising format largely because of their pay-for-performance nature, wherein advertising expenditures are closely tied to outcomes. While the pay-for-performance format substantially reduces the wastage incurred by advertisers compared to traditional pay-per-exposure advertising formats, the reduction of such wastage also carries the risk of reducing the signaling properties of advertising. Lacking a separating equilibrium, low-quality firms in these markets may be able to mimic the advertising strategies of high-quality firms. This study examines this issue in the context of online sponsored search markets. Using data gathered from sponsored search auctions for keywords in a market without intervention by the intermediary, we find evidence of adverse selection for products/services characterized by high uncertainty. On the other hand, there is no evidence of adverse selection for similar products in a regulated sponsored search market, suggesting that intervention by the search intermediary can have a significant impact on market outcomes and consumer welfare.
Key Words: electronic commerce; competitive impacts of IS; IT impacts on industry and market structure; econometrics
History: This paper was received on October 14, 2006.
Copyright © 2009 by INFORMS.
