Advertising as Coordination: Evidence from a Field Experiment

Abstract

Paid advertising can increase market efficiency by directing buyers to sellers with greater capacity. We show this with a field experiment in a large marketplace, where all sellers could choose to buy advertising but buyers were randomized into seeing the advertising. Contrary to concerns that buyers might infer advertising sellers were adversely selected, treated buyers sought out advertising sellers. Consistent with this buyer preference, advertising sellers were better on every measurable dimension, particularly in their capacity to take on more work. This shift in buyer attention to higher-capacity sellers increased market transaction volume by around 2%. Costly advertising was necessary to facilitate this coordination, as mere statements about capacity had become uninformative.