A “Position Paradox” in Sponsored Search Auctions
Linked resource found here.
This article analyzes the data set of a popular Korean search engine firm to prove the “position paradox” where a superior firm bids lower than an inferior firm to obtain position below it while still getting more clicks than it. Their findings show that a large proportion of auction outcomes from the Korean data set show the position paradox as well as that the predictions from the researcher’s model are validated.
This article relates to the topic sponsored search covered in lecture where we looked at advertising and charging for “clicks” on ads. There are some notable strategies of how to price ads. The first one, is simply to post prices, which resultantly ends up being too complex. The other strategy is doing a first price auction, which similarly can be chaotic. The last strategy is holding a second price auction.
In the article, we see that even despite bidding less that low-quality firm, high-quality firms obtain more clicks. This is because a superior firm may be confident that it will still get sufficient clicks because of its superior quality. The value of a position to a firm ultimately depends on the environment.