Strategizing Search Advertisement Positions
http://pubsonline.informs.org/doi/pdf/10.1287/mksc.1110.0645
The sponsored advertisements at the top of search results page, given a keyword (or a set of keywords), are popular among advertisers today to drive traffic to their websites. More importantly, they compete for rank positions within the sponsored ad space. General viewers are likely to expect to see names of established companies/brands right at the top. However, this may not always be the case based on the notion of “Position Paradox” (Jerath et al., 2011). In some cases, it may make more sense for a well-known company to secure a lower ad position. Conversely, this allows the relatively inferior company to get a higher position on the paid ad space. This placement strategy may, in turn, be more effective in terms of cost and payoffs (return on investment) for both companies.
The “Position Paradox” can further be explained based on the Generalized Second Price (GSP) auction that major search engines use to sell advertising slots. As part of this process, the highest bidder wins the top advertisement slot but pays the second-highest bid. The diagram (Easley & Kleinberg, 2010) below can help illustrate why advertisers may deviate from their true bids, and how this relates to the ad position strategy adopted by large and small companies.
Given that x is the big company and y is the small company here, a GSP auction would result in a payoff of 10 (7*10 – 6*10) for x and a payoff of 20 (6*4 – 1*4) for y. The advertiser x has the true ability to bid higher because it is a bigger company with perhaps a larger advertising budget than y. However, x can get a higher payoff by getting the second slot position. So it may make more sense for the bigger company x to bid 5 and get a payoff of 24 (7*4 – 1*4). From the point of view of the small company, the underbidding by x may sometimes lower the payoff for y in theory, but it can still largely benefit from the outcomes discussed below.
Jerath et al.’s research study analyzes the mutual benefits to small and big companies of switching their “true” advertisement slots. From the pay-per-impression lens, the small company benefits from being at the top and has a higher chance of being noticed. Getting noticed is not much of a concern for the big company, so a lower position will benefit in terms of a lower advertising cost. On the other hand, both companies will have advantages from the view of pay-per-click (PPC). The big company ad is likely to be clicked on despite its lower position because viewers are more aware of its brand, so they may turn to it as a safe option. The higher PPC cost will be compensated by the lower overall fee for advertising resulting from the lower position. Additionally, the smaller company has a greater incentive to be in the top position in the PPC mechanism. There is a greater chance for the small company to be seen before the viewer scrolls down to click on the ad by the more known company. The screenshot below can be considered a hypothetical example of the aforementioned positioning strategy for advertisers:
As can be seen, the ad for Bag Borrow or Steal appears at a higher position as compared with Nordstrom, even though the latter is a large and well-known retail store. Based on the concept of “Positive Paradox,” these ad positions would benefit both companies as a viewer types in “designer bags” for instance. More specifically, Nordstrom would pay a smaller advertisement fee for the lower position and yet be clicked on due to its brand name. Bag Borrow or Steal is likely to be acknowledged by the viewer nevertheless due to its top position on the search page. This shows that strategizing search ad positions via GSP auctions can indeed be helpful for advertisers to maximize traffic to their websites while minimizing costs.
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