The phenomenon of sponsored search advertising - where advertisers pay a fee to Internet search engines to be displayed alongside organic (non-sponsored) web search results - is gaining ground as the largest source of revenues for search engines. Despite the growth of search advertising, we have little understanding of how consumers respond to contextual and sponsored search advertising on the Internet. Using a unique panel dataset of several hundred keywords collected from a large nationwide retailer that advertises on Google, we empirically model the relationship between different metrics such as click-through rates, conversion rates, bid prices and keyword ranks. Our paper proposes a novel framework and data to better understand what drives these differences. We use a Hierarchical Bayesian modeling framework and estimate the model using Markov Chain Monte Carlo (MCMC) methods. We empirically estimate the impact of keyword attributes on consumer search and purchase behavior as well as on firms' decision-making behavior on bid prices and ranks. We find that the presence of retailer-specific information in the keyword increases click-through rates, and the presence of brand-specific information in the keyword increases conversion rates. We also demonstrate that as suggested by anecdotal evidence, search engines like Google factor in both the auction bid price as well as prior click-through rates before allotting a final rank to an advertisement. To the best of our knowledge, this is the first study that uses real world data from an advertiser and jointly estimates the effect of sponsored search advertising at a keyword level on consumer search, click and purchase behavior in electronic markets

The phenomenon of sponsored search advertising is gaining ground as the largest source of revenues for search engines. Firms across different industries have are beginning to adopt this as the primary form of online advertising. This process works on an auction mechanism in which advertisers bid for different keywords, and final rank for a given keyword is allocated by the search engine. But how different are firm's actual bids from their optimal bids? Moreover, what are other ways in which firms can potentially benefit from sponsored search advertising? Based on the model and estimates from prior work [10], we conduct a number of policy simulations in order to investigate to what extent an advertiser can benefit from bidding optimally for its keywords. Further, we build a Hierarchical Bayesian modeling framework to explore the potential for cross-selling or spillovers effects from a given keyword advertisement across multiple product categories, and estimate the model using Markov Chain Monte Carlo (MCMC) methods. Our analysis suggests that advertisers are not bidding optimally with respect to maximizing profits. We conduct a detailed analysis with product level variables to explore the extent of cross-selling opportunities across different categories from a given keyword advertisement. We find that there exists significant potential for cross-selling through search keyword advertisements in that consumers often end up buying products from other categories in addition to the product they were searching for. Latency (the time it takes for consumer to place a purchase order after clicking on the advertisement) and the presence of a brand name in the keyword are associated with consumer spending on product categories that are different from the one they were originally searching for on the Internet.

The Internet has brought about a fundamental change in the way consumers obtain and process information. It is well documented now that the online retailing revolution has established a new distribution channel that represents a fundamental paradigm shift in consumer buying patterns. Hence, firms are realizing that reaching the increasing number of online users by attracting clients to their websites is the key to bolstering online sales. In this regard, search engines are able to leverage the value as information location tools by selling advertising linked to search terms entered by online users and referring them to the advertisers. The phenomenon of sponsored search advertising - where advertisers pay a fee to Internet search engines to be displayed alongside organic (non-sponsored) web search results - is gaining ground as the largest source of revenues for search engines. The global paid search advertising market is predicted to have a 37 percent compound annual growth rate (CAGR), to more than $33 billion in 2010 and has become a critical component of firm's marketing campaigns. This is not surprising given that 94% of consumers use search engines to find information on the Web (Nielson-Net Ratings), and 81% who use search engines find the information they are looking for every time they search.