A Simple Model of Search Engine Pricing

Authors


  •  Corresponding author: Kfir Eliaz, Brown University. Economics Department, Brown University, Box B, Providence, RI 02912, USA. Email: kfir_eliaz@Brown.edu.

  • Financial support from ERC grant no. 230251, NSF grant SES #0802789, ESRC (UK) and the Sapir Center is gratefully acknowledged. We thank Mark Armstrong for helpful comments.

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.

Ancillary