Search Engine Advertising Pricing Ads to Context

1. Search Engine AdvertisingPricing Ads to Context Discussant: Chris Dellarocas cdell@umd.edu

2. Paper Summary • Main findings • In states where lawyers cannot contact clients by mail price per ad click $0.93 higher • In states with contingency fee limits price per ad click $2.27 lower • Author conclusions • Match-difficulty increases price of sponsored links • Use of context can monetize the long tail by reducing friction in the matching process

3. Empirical method • Compare average price per ad click of same set of keywords in different geographical regions with different legislation • Very interesting idea that can inspire other researchers • Careful execution and analysis

4. What explains the results? • Let’s go back to good-ol’ auction theory: Bid = expected valuation (per click) Avg. Payment = Exp. second-highest bid Expected valuation per exposure = Pr[click]*Pr[buy|click]*Unit_Profit Expected valuation per click = Pr[buy|click]*Unit_Profit

5. What explains the results? Bid = Pr[buy|click]*Unit_Profit Avg. Payment = Exp. Second highest bid • Continency fee limits  lower Unit_Profit  lower Bid  lower Payment • Offline advertising bans  fewer alternative outlets  more lawyers resorting to keyword bidding  more bidders  higher expected second highest bid  higher Payment

6. What I think is going on… • Keyword bids reflect the bidder’s expected valuation of a click • Lack of alternative advertising outlets increases the number of lawyers who bid for keywords, which drives prices up • Both behaviors consistent with rationality – not surprising

7. Comments on authors’ main point • “Search engines can monetize the difficulties that vendors have finding clients in thin markets” • In the authors’ setting match difficulty offline was “artificially” driven by legislation – there is nothing special about keyword search technology that reduces friction in this case • What I think is happening is that, given that offline and online media are substitutes, restricting access to one channel will increase demand for the other • However, my interpretation is also tentative (is there a way to measure the average # of bids per keyword varies in the different regions studied by the authors?)

8. Conclusions • The authors have conducted a beautiful natural experiment that can inspire other researchers • But need a little more work in weaving the right set of “so-what” implications • Quantify the degree of offline and online substitutability • Include search ads in efforts to limit “ambulance chasing” • …