Quality Uncertainty And Adverse Selection In Sponsored Search Markets

Sponsored search mechanisms, where advertisers bid for placement to beas close to the top in the listing of search results, are the fastestgrowing among online search models. Sponsored search in popular searchservices such as Google and Yahoo! employ an auction mechanism whereinfirms can bid, for a better placement in the (sponsored) search results,on relevant keywords used by consumers in their search process. Thisprovides an unprecedented opportunity to test some of the predictions ofearlier research relating quality and advertising, in the onlinesetting. While sponsored search mechanisms have been gaining popularity,they can potentially introduce a bias in the listing of search results.In particular, sponsored search mechanisms that enable low qualitybidders to be placed at the top of the search listings can adverselyaffect consumer welfare. Our study uses data from online sponsoredsearch auctions to examine the relationship between advertisers' qualityand their bidding strategies. Specifically we seek to understand ifadvertisers' bidding strategies differ across products characterized bydifferent degrees of quality-uncertainty. Our results indicate thatthere are significant differences in the bidding strategies of sellersof search goods as compared to sellers of experience and credence goods,and that there is significant adverse selection in product categoriescharacterized by greater uncertainty. We discuss the implications of ourfindings for consumers, advertisers, and intermediaries and providedirections for future research in this emerging context.