The Impact Of Online Sponsored Search Advertising On Consumer And Seller Strategies

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Sponsored search advertising has emerged as an important and significant forum for advertisers, accounting for 40% of all advertising spending online. The unique features of sponsored search advertising - the nature of consumer search as well as the pricing mechanisms employed - differentiate it from traditional advertising formats, and raise many interesting questions regarding consumers' search and purchase behavior, sellers' advertising strategies, and the ensuing market dynamics. However, despite the robust growth in sponsored search advertising, research on its implications is limited. My dissertation, comprising three essays, seeks to fill this gap. In addition to examining the effects of sponsored search advertising on consumers and sellers, I also investigate the validity of theories developed for traditional media in an emerging online sponsored search context.

The first essay focuses on the impact of a seller's sponsored search advertising strategies, including its rank in the sponsored listing, the unique selling proposition (USP) employed in its advertisement text/creative, and competitive market dynamics on the performance of the focal seller's advertisement. Drawing upon prior research on consumer search and directional markets, I propose a model of the consumer search process in the sponsored search context and conduct an empirical study to test the research model. The results validate the research hypothesis that the search listing can act as a consumer filtering mechanism and competitive intensity within adjacent ranks has a significant impact on the seller's performance.

The second essay employs consumer search and quality signaling theories from information systems, marketing, and economics to understand the impact of the informational cues contained in the sponsored search listing about sellers' relative advertising expenditure on consumer search and purchase behavior. Contrary to conventional wisdom, I find that the unique format of the sponsored search listing significantly increases the strength of the advertising signal vis-à-vis the price signal. In addition, I find that the risk attitude of consumers has a significant impact on the valence of these different information cues in the online setting.

The third essay examines market outcomes in directional markets such as sponsored search and comparison shopping advertising. Specifically, I focus on comparison shopping advertising where advertising not only informs consumers about price and quality but also directs consumer search. I find that the relationship between a firm's price, quality, and advertising intensity in this market is strikingly different from that in traditional markets, a result attributable to the differential impact of price and quality on an advertiser's conversion rates and profit margins.

Overall, these studies provide crucial insights into consumer behavior in online sponsored search markets. These findings have significant implications for firms, as well as for the market makers. Insights from these studies will enable practitioners to develop appropriate advertising strategies and online intermediaries to optimize the design of online sponsored search markets.