Santa Clara University

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Leavey Research Seminar Series: Ram Bala : OMIS : March 8, 2013

noon to 1:30 PM

Title: Sponsored Search vs. Search Engine Optimization: Competitive strategies for internet retailer.

Small unbranded internet retailers typically acquire customers through search engines. Customers can reach the websites of such retailers by clicking on either the sponsored search links or the organic links of the search results page. Retailers appear in the sponsored search results by bidding on specific keywords that customers use for search and appear in the organic results by investing in the design of their websites (known as engine optimization, SEO). We analyze the small retailer's advertising investment decision in the context of competition from a large retailer such as Amazon. We formulate a game-theoretic model of such competition and derive several insights for both retailers based on equilibrium analysis.

We find that SEO investment and sponsored search act as substitutes for the unbranded retailer and as complements for the branded retailer. This implies that the branded retailer may use sponsored search as a defensive strategy, particularly when the unbranded retailer invests in SEO. Further, at low SEO costs, the unbranded retailer does not invest in SEO when the cost per click for sponsored links is in an intermediate range. Thus, the advertising investment decision for the unbranded retailer depends on the interaction between the cost structures of SEO / sponsored search and the nature of the competitive environment. Finally, our results support anecdotal evidence in the popular press that suggests that unbranded retailers may be underinvesting in SEO while overinvesting in sponsored search.

This is joint work with Amit Mehra (ISB) and Jagmohan Raju (Wharton).


Lucas Hall

Business School Dean's Office
Channing McCabe
Tel (408) 554-4329
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