Search Engine Advertising: Pricing Ads to Context

Abstract

Each search term put into a search engine produces a separate set of results. Correspondingly, each of the sets of ads displayed alongside the results is priced using a separate auction. We investigate how bids for these context-based ads depends on the difficulty of making a match. This contrasts with the existing literature that focuses on the effect of match quality. We examine advertising prices paid by lawyers for 139 Google search terms in 195 locations. Other things being equal, the fewer searches there are on a term, the higher the price. To identify a causal relationship between match-difficulty and prices paid, we exploit a natural experiment in 'ambulance-chaser' regulations across states. When lawyers cannot contact a client by mail and matching becomes more difficult, the relative price per ad click is $0.93 higher. We check the robustness of this result by performing a falsification test using a different ambulance-chaser regulation. Our results suggest that prices are higher for context-based ads when the difficulty of both online and off-line matching increases. This highlights that a major reason why search advertising is profitable is because its use of context can monetize the 'long tail' by reducing friction in the matching process