Sponsored search advertising is ascendant Jupiter Research reportsexpenditures rose 28% in 2007 to $8.9B and will continue to rise at a15% CAGR, making it one of the major trends to affect the marketinglandscape. Yet little, if any empirical research focuses upon searchengine marketing strategy by integrating the behavior of various agentsin sponsored search advertising (i.e., searchers, advertisers, and thesearch engine platform). The dynamic structural model we propose servesas a foundation to explore these and other sponsored search advertisingphenomena. Fitting the model to a proprietary data set provided by ananonymous search engine, we conduct several policy simulations toillustrate the bene ts of our approach. First, we explore howinformation asymmetries between search engines and advertisers can beexploited to enhance platform revenues. This has consequences for thepricing of market intelligence. Second, we assess the effect of allowingadvertisers to bid not only on key words, but also by consumerssearching histories and demographics thereby creating a more targetedmodel of advertising. Third, we explore several different auctionpricing mechanisms and assess the role of each on engine and advertiserprofits and revenues. Finally, we consider the role of consumer searchtools such as sorting on consumer and advertiser behavior and enginerevenues. One key finding is that the estimated advertiser value for aclick on its sponsored link averages about 24 cents. Given the typical$22 retail price of the software products advertised on the consideredsearch engine, this implies a conversion rate (sales per click) of about1.1%, well within common estimates of 1-2% (gamedaily.com). Hence ourapproach appears to yield valid estimates of advertiser clickvaluations. Another finding is that customers appear to be segmented bytheir clicking frequency, with frequent clickers placing a greateremphasis on the position of the sponsored advertising link. Estimationof the policy simulations is in progress.
