Open AccessA Simple Model of Search Engine Pricing *
Author(s) -
Eliaz Kfir,
Spiegler Ran
Publication year - 2011
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/j.1468-0297.2011.02467.x
Subject(s) - monopolistic competition , search engine , search cost , microeconomics , search analytics , economics , metasearch engine , relevance (law) , set (abstract data type) , computer science , monopoly , mathematical economics , information retrieval , web search query , programming language , political science , law
We present a simple model of how a monopolistic search engine optimally determines the average relevance of firms in its search pool. In our model, there is a continuum of consumers, who use the search engine's pool, and there is a continuum of firms, whose entry to the pool is restricted by a price‐per‐click set by the search engine. We show that a monopolistic search engine may have an incentive to set a relatively low price‐per‐click that encourages low‐relevance advertisers to enter the search pool. In general, the ratio between the marginal and average relevance in the search pool induced by the search engine's policy is equal to the ratio between the search engine's profit per consumer and the equilibrium product price. These conclusions do not change if the search engine charges a fixed access fee rather than a price‐per‐click.