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A Simple Model of Search Engine Pricing

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  • Eliaz, Kfir
  • Spiegler, Ran
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 encouarges 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 fixed access fee rather than a price-per-click.

Suggested Citation

  • Eliaz, Kfir & Spiegler, Ran, 2010. "A Simple Model of Search Engine Pricing," Foerder Institute for Economic Research Working Papers 275752, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275752
    DOI: 10.22004/ag.econ.275752
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    References listed on IDEAS

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    1. Hagiu, Andrei, 2009. "Why Do Intermediaries Divert Search?," Department of Economics, Working Paper Series qt3f34c5dk, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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    4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    5. Zhou, Jidong, 2009. "Prominence and Consumer Search: The Case With Multiple Prominent Firms," MPRA Paper 12554, University Library of Munich, Germany.
    6. Asher Wolinsky, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 493-511.
    Full references (including those not matched with items on IDEAS)

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