How to Reduce Costs in PPC (pay per click) Advertising Without Colluding
Companies in the same industry often bid for each others’ company adwords in search engines like Google. Let’s take Verizon and AT&T as hypothetical examples. Suppose that this game has two players Verizon and AT&T and has two strategies bid for the other company’s adwords and don’t bid for the other company’s adwords. Let the payoff be the customers attracted by the ad divided by the cost of the adword. If both Verizon and AT&T bid for each others adwords, they would both have to spend a lot of money in the adword action and split the customer base by half. In this strategy let’s say that the payoff for both Verizon and AT&T is 1. If Verizon bids for AT&T’s adwords, but AT&T doesn’t bid for Verizon’s adwords, then Verizon will gain more customers and pay much less at the adword auction. In this strategy, Verizon would get a payoff of 4 and AT&T would get a payoff of 0. Alternately, if AT&T bidded but Verizon didn’t. Then the payoff for Verizon would be 0 and the payoff for AT&T would be 4. However, if both agreed not to bid for each other’s adwords, then they would get to split the customers evenly without spending money in the adword auction. The Payoff would be 3 for both companies. In this hypothetical game, the dominant strategy for both companies would be to bid for each other’s adwords and both companies would be worst off. To maximize the payoff for both companies, they would have to collude and agree on not bidding in the adword auction. However, collusion in adword auctions is illegal. In 2004, 1-800 Contacts was found guilty of colluding with 14 other companies in an adword auction.
So how can companies reduce costs in PPC advertising without colluding? Instead of bidding for the same adwords that target the entire customer base, they can split the customer base by using RLSA (Remarketing Lists for Search Ads) and spend much less in the auctions. RLSA ads are triggered when a user is in a company’s remarketing list and is actively searching for the keywords a company is bidding on. RLSA provides a better return on investment because they are cheaper and target visitors who are more likely to become a company’s customer. Verizon and AT&T can and probably does use RLSA to reduce its PPC advertising costs. RLSA allows companies to reach the collectively best outcome without having to collude.
http://smallbiztrends.com/2016/08/ppc-marketing-game-theory.
htmlhttp://www.wordstream.com/blog/ws/2015/03/12/remarketing-lists-for-search-ads