Emergent Heterogeneity in Keyword Valuation in Sponsored Search Markets: A Closer-to-Practice Perspective

Abstract

Reported literature in sponsored search advertising markets asserts that at equilibrium an advertiser has no incentive to swap her position with another advertiser and her bid on a keyword would be bound with the click value acting as an upper bound. We investigate a closer-to-practice case where advertisers do not have an ex-ante known value per click and her bid on a keyword is an outcome of simple cost-cap heuristics on a portfolio of keywords. Using simulations and an experimental setup containing advertisers that have the same upper-cap on cost, we show that the distribution of advertisers� cost per click and bids are emergent in nature. Keywords exhibit ex post heterogeneity in observed valuation even when all advertisers bid under the same cost-cap constraint. We explore the dynamics of the market, such as temporal stability of advertiser�s bids, and advertiser�s rank based on the click-share along with the distribution of ex post valuation of keywords associated with this closer to practice setup. The results call for a richer understanding of these markets that can incorporate temporal interdependence between auctions of a keyword as well as boundedly rational behavior of advertisers working under imperfect information. � 2016, Springer Science+Business Media New York.