Online Sponsored Search Markets vs. Traditional Sponsored Search Markets

Today, online search engines such as Yahoo! or Google are mainly using the sponsored search mechanism as their dominant revenue model. This means that advertisers bid for a higher listing in  search results.  The advertisement in the online sponsored search market has several advantages in comparison with the traditional sponsored search market. Not only costumers looking for a specific product are benefiting through a direct link to companies which are offering the certain product or service. Also, the sponsored search market provides an information environment with a pre-selection of sellers sorted  by their relevancy. The so-called sequential search creates a “directional market” which encourages an increased contest between companies competing for the highest spot on the ranking of search engines. Since consumers have a tendency to believe that higher ranked firms are also correlated with higher quality in products and services, smaller companies try to mimic the advertisement strategies of high-quality sellers, caused through the directional nature of the market. That is why there exists competitive dynamics which did not exist in the traditional advertisement market. A good example of the traditional advertisement market is “Yellow Pages”. In general, advertisement on the media, like on TV or radio, work old-fashioned. They differ to the directional market because customers get a random sample of firms with no pre-selection related to their interest. There is a clear differentiation between the individual interest of customers and the advertising. Another big distinction is the pricing of the advertisements. In the old way, companies have to pay-per-exposure, paying a fixed sum given a number of impressions and exposures. In opposite to that, suppliers participating in the online sponsored search market only get charged by the pay-per-performance price mechanism. These companies only pay for each click and not for exposures. This gives us a general idea of the differences between traditional and online sponsored search advertising and how they are based on different concepts.


Quality Uncertainty and the Performance of Online Sponsored Search Markets: An Empirical Investigation, by Animesh Animesh, Vandana Ramachandran, Siva Viswanathan