Analyzing search engine advertising: firm behavior and cross-selling in electronic markets

The phenomenon of sponsored search advertising is gaining ground as the largest source of revenues for search engines. Firms across different industries have are beginning to adopt this as the primary form of online advertising. This process works on an auction mechanism in which advertisers bid for different keywords, and final rank for a given keyword is allocated by the search engine. But how different are firm's actual bids from their optimal bids? Moreover, what are other ways in which firms can potentially benefit from sponsored search advertising? Based on the model and estimates from prior work [10], we conduct a number of policy simulations in order to investigate to what extent an advertiser can benefit from bidding optimally for its keywords. Further, we build a Hierarchical Bayesian modeling framework to explore the potential for cross-selling or spillovers effects from a given keyword advertisement across multiple product categories, and estimate the model using Markov Chain Monte Carlo (MCMC) methods. Our analysis suggests that advertisers are not bidding optimally with respect to maximizing profits. We conduct a detailed analysis with product level variables to explore the extent of cross-selling opportunities across different categories from a given keyword advertisement. We find that there exists significant potential for cross-selling through search keyword advertisements in that consumers often end up buying products from other categories in addition to the product they were searching for. Latency (the time it takes for consumer to place a purchase order after clicking on the advertisement) and the presence of a brand name in the keyword are associated with consumer spending on product categories that are different from the one they were originally searching for on the Internet.