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