Targeting with consumer search: an economic analysis of keyword advertising

Abstract

This article investigates the role of a search engine as an intermediary between firms and consumers. Search engines enable firms to target consumers who have revealed some specific needs through their query. In a framework with horizontal product differentiation, imperfect product information and in which consumers incur search costs, I show that introducing a mechanism which enables firm to target consumers tends to reduce social inefficiencies and the equilibrium price. A profit maximizing search engine has incentives to design the mechanism so as to soften price competition between firms, in order to extract profit from them, and this may or not be socially efficient. Sufficient conditions for efficiency or inefficiency of the outcome are provided.