Search engines enable advertisers to target consumers based on the query they have entered. In a framework in which consumers search sequentially after having entered a query, I show that targeting reduces search costs, improves matches and intensifies price competition. However, a profit-maximizing monopolistic search engine imposes a distortion by charging too high an advertising fee, which may negate the benefits of targeting. The search engine also has incentives to provide a suboptimal quality of sponsored links. Competition among search engines can increase or decrease welfare, depending on the extent of multi-homing by advertisers.
search engine; targeted advertising; consumer search;
- D43: Oligopoly and Other Forms of Market Imperfection
- D83: Search • Learning • Information and Knowledge • Communication • Belief
- L13: Oligopoly and Other Imperfect Markets
- M37: Advertising
American Economic Journal: Microeconomics, vol. 8, n. 3, August 2016, pp. 156–188