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Cooperative Search Advertising

Author

Listed:
  • Xinyu Cao

    (Stern School of Business, New York University, New York, New York 10012)

  • T. Tony Ke

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139-4307)

Abstract
Channel coordination in search advertising is an important but complicated managerial decision for both manufacturers and retailers. Because of the highly concentrated market of search advertising, a manufacturer’s and its retailers’ ads can compete instead of complementing each other. We consider a manufacturer, who coordinates with its retailers by sharing a fixed percentage of each retailer’s advertising cost and, at the same time, competes with its retailers and outside advertisers in search ad position auctions. Our model prescribes the optimal cooperative advertising strategies from the manufacturer’s perspective. We find that different from cooperative advertising in traditional media, it can be optimal for a manufacturer to cooperate with only a subset of its retailers even if they are ex ante the same. This reflects the manufacturer’s trade-off between higher demand and higher bidding cost caused by more intense competition. We also find that with two asymmetric retailers, the manufacturer should support the retailer with higher channel profit per click to get a higher position than the other retailer, which demonstrates the effectiveness of the participation-rate mechanism. The manufacturer should take a higher position than a retailer when its profit per click via direct sales exceeds the channel profit per click of the retailer. The main results still hold when we endogenize retail price competition or wholesale contracts.

Suggested Citation

  • Xinyu Cao & T. Tony Ke, 2019. "Cooperative Search Advertising," Marketing Science, INFORMS, vol. 38(1), pages 44-67, January.
    • Handle: RePEc:inm:ormksc:v:38:y:2019:i:1:p:44-67
    DOI: 10.1287/mksc.2018.1111
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    References listed on IDEAS

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    Cited by:

    1. Brett R Gordon & Kinshuk Jerath & Zsolt Katona & Sridhar Narayanan & Jiwoong Shin & Kenneth C Wilbur, 2019. "Inefficiencies in Digital Advertising Markets," Papers 1912.09012, arXiv.org, revised Feb 2020.
    2. Singh, Ashutosh & Sajeesh, S. & Bhardwaj, Pradeep, 2024. "Whitelisting versus advertising-recovery: Strategies to overcome advertising blocking by consumers," European Journal of Operational Research, Elsevier, vol. 318(1), pages 217-229.
    3. Chalil, Tengku Munawar & Dahana, Wirawan Dony & Baumann, Chris, 2020. "How do search ads induce and accelerate conversion? The moderating role of transaction experience and organizational type," Journal of Business Research, Elsevier, vol. 116(C), pages 324-336.
    4. Wu, Xiangxiang & Zha, Yong & Yu, Yugang, 2022. "Asymmetric retailers’ sales effort competition in the presence of a manufacturer’s help," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 159(C).
    5. Sarat Kumar Jena & Abhijeet Ghadge, 2022. "Product bundling and advertising strategy for a duopoly supply chain: a power-balance perspective," Annals of Operations Research, Springer, vol. 315(2), pages 1729-1753, August.
    6. W. Jason Choi & Amin Sayedi, 2023. "Open and Private Exchanges in Display Advertising," Marketing Science, INFORMS, vol. 42(3), pages 451-475, May.
    7. Qian, Zhifeng & Day, Steven James & Ignatius, Joshua & Dhamotharan, Lalitha & Chai, Junwu, 2024. "Digital advertising spillover, online-exclusive product launches, and manufacturer-remanufacturer competition," European Journal of Operational Research, Elsevier, vol. 313(2), pages 565-586.

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