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A Simple Model of Search Engine Pricing

The Economic JournalPublished 24 October 2011
Kfir Eliaz, Ran Spiegler
Citations90
SJR quartileQ1
SJR score5.37
SNIP2.83

Abstract

We present a simple model of how a monopolistic search engine optimally determines the average relevance of firms in its search pool. In our model, there is a continuum of consumers, who use the search engine’s pool, and there is a continuum of firms, whose entry to the pool is restricted by a price‐per‐click set by the search engine. We show that a monopolistic search engine may have an incentive to set a relatively low price‐per‐click that encourages low‐relevance advertisers to enter the search pool. In general, the ratio between the marginal and average relevance in the search pool induced by the search engine’s policy is equal to the ratio between the search engine’s profit per consumer and the equilibrium product price. These conclusions do not change if the search engine charges a fixed access fee rather than a price‐per‐click.

Keywords

Decision SciencesBusiness, Management and Accounting