Diversification in the internet economy: the role of for-profit mediators

We investigate market forces that would lead to the emergence of new classes of players in the sponsored search advertising market. We report a multi-fold diversification triggered by an inherent feature of the sponsored search market, namely, capacity constraints, arising from the fact that there is a limit on the number of available advertisement slots, especially for the popular keywords. As a result, a significant pool of interested advertisers are left out. We present a comparative study of two scenarios motivated by capacity constraints - one where the additional capacity is provided by for-profit agents (or, mediators), who compete for slots in the original auction, draw traffic, and run their own sub-auctions, and the other, where the additional capacity is provided by the auctioneer herself, by essentially acting as a mediator and running a single combined auction. The quality of the additional capacity is measured by its fitness factor. We observe that the single combined-auction model seems inferior to the mediator-based model and market becomes more capacity efficient in the latter. For instance, the revenue of the auctioneer always increases when mediators are involved, unlike the auctioneer based scenario where often there is a tradeoff between the revenue and the capacity. Further, the social value (i.e. efficiency) always increases when mediators are involved. Thus, our analysis indicates that there are significant opportunities for diversification in the internet economy and we should expect it to continue to develop richer structure, with room for different types of market entities and mechanisms to coexist.