The moderating effects of keyword competition on the determinants of ad position in sponsored search advertising

Highlights

• We empirically examine the moderating effects of keyword competition on ad position.

• The study provides insights into keyword competition and sponsored ad performance.

• Competition has a significant moderating effect only for multi-channel retailers.

• Ad position for web-only retailers is dependent on bid values and relevancy factors.

• Multi-channel retailers are more reliant on their bid values.

Abstract

This study uses a unique cross-sectional dataset of the top 500 internet retailers in North America and empirically investigates the moderating effects of keyword competition on the relationship between ad position and its determinants in the sponsored search market. The study draws on the literature in keyword auction design, search advertising performance, and consumer search behavior as the theoretical foundation. The study finds a significant variation in the role of keyword competition for web-only versus multi-channel retailers. Specifically, this study finds that keyword competition has a significant moderating effect only for multi-channel retailers. The empirical analysis also indicates that the position of ads for web-only retailers is dependent on bid values and ad relevancy factors, whereas multi-channel retailers are more reliant on their bid values. We discuss the implications of these results in light of the increased popularity of sponsored search advertising in recent years.

Introduction

The internet has enabled the distribution of information to be affordable, convenient, and remarkably fast. Search engines in particular have been shown to be the primary gateway for most internet users seeking information [43]. The growth of users, along with simple, targeted, and customizable advertising, has allowed search engines to be the dominant online marketing channel on the internet. Given the unique challenges advertisers face in this growing and dynamic marketplace (e.g., three-agent interaction,¹ mounting competition, and increasing budget allocation), it is evident that they must understand the competitive environment to develop effective campaign strategies and achieve their marketing goals. Not only is the display of an ad directly related to the marketing goal, but so is the position of the ad within the search engine result pages (SERPs). Although advertisers vary in their marketing goals (e.g., brand awareness, revenue maximization, lead generation), the conventional wisdom in the industry is that the top position is the most desirable position, leading to intense competition to secure the top positions in the SERPs [3].

The increasingly competitive keyword market requires advertisers to engage in several challenging activities, which include selecting relevant keywords, crafting compelling ad copies, setting appropriate ad budget, and formulating bidding strategies, among others. For example, firms with poor ad budgets may not attain their desired ad positions simply because their ads may not even be considered for the auctions. To effectively compete in this challenging environment, firms experiment with different strategies or use the services of third parties. However, what works in one competitive circle may not necessarily work in another. One feasible way for firms to improve their search advertising performance is to gain sufficient knowledge of the keyword competition and its impact on achieving their desired ad positions using different pay-per-click (PPC) strategies. Meanwhile, search engines have employed mechanisms that rank ads not only based on bid values, but also attributes related to advertisers' performance [21], [48], [51], [52]. For example, Google uses a measure called Quality Score [35] to determine whether an ad is eligible (relevant) to enter the auction as well as its position on the SERP.² Thus, the overall search advertising outcome for a firm can be influenced by the profiles as well as number of other firms competing for similar keywords.

Early research in sponsored search advertising has focused on the design of keyword auctions and the equilibrium outcome in these auctions (e.g., [21], [27], [28], [48], [51], [52], [70]). Another stream of research analyzes sponsored search ad performance and the relationship between different sponsored search metrics [32], [33], [34], [60], [61], [65]. Other related empirical studies have investigated consumer search behavior in sponsored search market and the classification of web queries (e.g., [42], [44], [45]). Despite the sheer number of firms competing in the keyword market, there is limited empirical work that examines how competition intensity impacts the sponsored search outcomes for firms. A few researchers have studied different aspects of competition in sponsored search auctions. For example, [46] studied a “position paradox” in a keyword auction market, where a superior firm may bid lower than an inferior firm and obtain a position below it, but still obtains more clicks than the inferior firm. [10] showed that the effect of a firm's ad rank on its ad's click-through rate (CTR) is moderated by the firm's ability to differentiate itself from its adjacent rivals in the SERP. [76] illustrated that the value of search advertising slots should be determined endogenously in price competition. They show that a more prominent slot may or may not be more valuable, even if it is cost-free. Thus, firms in different competitive situations should tailor their advertising strategies accordingly [76].

In this study, we empirically investigate the impact of competition intensity on the relationship between a firm's key sponsored search variables (i.e., bid value, click-through rate, and ad quality) and its ad position in the keyword market. Using cross-sectional data on the search advertising practices of firms in the retailing industry, we analyze how the level of competition in the keyword market moderates the relationship between a firm's ad position and its key determinants. We draw on insights from the literature in keyword auction design, search advertising performance, and consumer search behavior to develop and test several empirical models that account for differences in merchant type, company size, advertising budget, and search engine optimization (SEO) performance.

The retailing industry is characterized by extensive search advertising practices and high-stakes battle for market share and profitability [39], [40]. Given that internet retailers are at the very end of the supply chain, advances in web technologies have enabled them to develop new marketing strategies in their advertising campaigns. Utilizing this new form of advertising with its growing consumer exposure enables retailers to expand their market share. We believe that our unique, cross-sectional data and the analyses based on the top performing retailers in North America will be important additions to the empirical base of the sponsored search advertising literature and offer practical insights into the keyword market in general and the search advertising practices within the retailing industry in particular.

The rest of this paper is organized as follows. Section 2 presents a review of the literature in search advertising. Section 3 presents the conceptual framework and the theoretical foundations. Section 4 outlines the research model and the hypotheses of this study. Section 5 describes the data collection procedure, the research methodology, and the empirical results. Section 6 presents the discussion of the results and the theoretical and practical implications of the study. Finally, Section 7 provides the conclusions, limitations, and future research directions.