Market Effects of Brand Search Advertising

ABSTRACT

We study the market effects of sponsored search auctions for advertising space on searches for brands. In our model, firms simultaneously choose the price of their product and the bids for the advertising auctions triggered by their own and rivals' brand keywords search. In any symmetric equilibrium, each firm wins its own keyword auction, and relative to a no‐ads benchmark, online advertising raises the winning brand's marginal cost and ultimately market prices. Only in an environment with strong initial asymmetries do we find that brand advertising might be beneficial.