Too Organic for Organic Listing? Interplay between Organic and Sponsored Listing in Search Advertising

Abstract

This paper aims to answer three major questions related to the unexplored role of organic listing in online search advertising: (1) Should advertisers who are already placed at top slots in the organic list bid actively for sponsored positions? (2) Does organic listing benefit or harm search engine revenue, social welfare, and overall sales diversity? (3) How can organic ranking be improved? We set up a game-theoretic model in which firms bid for sponsored advertising slots and compete for consumers in the product market. Firms are asymmetrically differentiated in terms of market preference and are placed at different organic slots with different prominence based on their relative popularity. We identify two major incentives for sponsored bidding when advertisers face the two competing lists: the promotive and predatory incentives. We investigate the interaction between the two forces across firms within different market structures and derive the equilibrium bidding outcome. We analyze the effects of the organic listing on equilibrium outcomes by comparing it with a benchmark case in which there is only a sponsored list. We find that, in general, organic listing may hurt search engine revenue, yet it could induce higher social welfare and sales diversity. To overcome the shortcomings of the organic listing that arise in the presence of huge competence differences among advertisers, we propose a mixed organic ranking mechanism in place of the typical popularity-based ranking rule. We show that the proposed organic ranking may improve equilibrium outcomes such that revenue, welfare, and diversity increase concurrently.