Cyclical Bid Adjustments in Search-Engine Advertising

Xiaoquan (Michael) Zhang () and Juan Feng ()
Additional contact information
Xiaoquan (Michael) Zhang: Department of Information Systems, Business Statistics and Operations Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Juan Feng: Department of Information Systems, College of Business, City University of Hong Kong, Kowloon, Hong Kong

Management Science, 2011, vol. 57, issue 9, 1703-1719

Abstract: Keyword advertising, or sponsored search, is one of the most successful advertising models on the Internet. One distinctive feature of keyword auctions is that they enable advertisers to adjust their bids and rankings dynamically, and the payoffs are realized in real time. We capture this unique feature with a dynamic model and identify an equilibrium bidding strategy. We find that under certain conditions, advertisers may engage in cyclical bid adjustments, and equilibrium bidding prices may follow a cyclical pattern: price-escalating phases interrupted by price-collapsing phases, similar to an "Edgeworth cycle" in the context of dynamic price competitions. Such cyclical bidding patterns can take place in both first- and second-price auctions. We obtain two data sets containing detailed bidding records of all advertisers for a sample of keywords in two leading search engines. Our empirical framework, based on a Markov switching regression model, suggests the existence of such cyclical bidding strategies. The cyclical bid-updating behavior we find cannot be easily explained with static models. This paper emphasizes the importance of adopting a dynamic perspective in studying equilibrium outcomes of keyword auctions. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors.

Keywords: bid adjustment; Edgeworth cycle; keyword auction (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1110.1408 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:57:y:2011:i:9:p:1703-1719

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().