Kamis, 03 Oktober 2013
Consumers using a search engine face the option of clicking organic or sponsored links. The organic links are ranked according to their relevance to the search query, whereas the sponsored links are allocated to advertisers through a competitive auction. Because consumers tend to trust organic links more, advertisers often try to increase their visibility in the organic list by gaming the search engine's ranking algorithm using techniques collectively known as search engineoptimization (SEO). (1)
A notable example of the dramatic impact that an SEO campaign can have is that of JCPenney, an American retailer. This retailer's organic links skyrocketed during the 2010 holiday shopping season and suddenly climbed to the top of the searchresults for many general keywords such as "dresses," "bedding," and "furniture" (Segal 2011). JCPenney eventually fired their SEO contractor after finding out that they used black hat techniques that eventually led to a punitive response from Google. Search engine optimization is widespread in the world of online advertising; a 2010 survey of 1,500 advertisers and agencies revealed that 90% of them engaged in SEO, compared with 81% who purchased sponsored links (Econsultancy 2010). In the past few years, search engine optimization has grown to become a multibillion dollar business (VanBoskirk 2009).
This paper explores the economics of the SEO process and its effects on consumers, advertisers, and search engines. Using a game-theoretical model, we fully characterize the incentives and trade-offs of all players in the ecosystem. Our model consists of (i) advertisers with exogenous qualities and potentially correlated valuations for clicks, competing for the attention of consumers; (ii) a search engine that offers both organic and sponsored links and can set minimum bids; and (iii) consumers who engage in costly search to find the highest quality site. To capture the effect of SEO, we model the imperfections in the algorithms used by search engines, assuming that there is a measurement error that prevents thesearch engine from perfectly ordering links according to quality. Advertisers can, in turn, manipulate the potentially erroneous quality observations to their advantage through SEO and improve their ranking. A key parameter of our model is the effectiveness of SEO, determining the extent to which SEO efforts by advertisers affect the organic results.
We first ask how SEO changes the organic results and whether these changes are always detrimental to consumers and high-quality advertisers. The interest in this question stems from the strong stance that search engines typically take against SEO by emphasizing the potential downside on organic link quality. To justify their position, search enginestypically claim that their manipulation results hurt consumer satisfaction and decrease the welfare of "honest" sites. In contrast, search engines also convey the message that the auction mechanism for sponsored links ensures that the best advertisers will obtain the links of highest quality, resulting in higher social and consumer welfare. This reasoning suggests that consumers should trust sponsored links more than organic links in equilibrium and would prefer to start searching on the sponsored side. A substantial contribution of using a sophisticated model for consumers is that we are able to derive their optimal search behavior. Contrary to claims by search engines, we find that search engines fight SEO because of the trade-off advertisers face between investing in sponsored links and investing in influencing organic rankings. As a consequence, search engines may lose revenue if sites spend significant amounts on SEO activities instead of on paid links and content creation.
To approach the issue of diminished welfare from SEO, we first focus on the case where sponsored links are not available to advertisers and consumers. This base model serves as a benchmark and gives us a deeper understanding of the nature of the competition for organic links when using SEO activities. Our first result reveals that SEO can be advantageous by improving the organic ranking. In the absence of sponsored links, this only happens when advertiser quality and valuation are positively correlated. That is, if sites' valuations for consumers are correlated with their qualities, then consumers are better off with than without some positive level of SEO. By contrast, if there are sites that extract high value from visitors yet provide them with low quality, then SEO is generally detrimental to consumer welfare. The SEO process essentially allows sites with a high value for consumers to correct the search engine's imperfect ranking through a contest.
The second question we ask focuses on the full interaction between organic and sponsored links when SEO is possible. The institutional differences between the organic and sponsored lists are critical to the understanding of our model. First, advertisers usually pay for SEO services up front, and the effects can take months to materialize. On the other hand, bids for sponsored links can be frequently adjusted depending on the ordering of the organic list. Second, SEO typically involves a lump-sum payment for initial results, and the variable portion of the cost tends to be convex, whereas payment for sponsored links is on a per-click basis, with very little or no initial investment. Finally, there is substantial uncertainty in the outcome of the SEO process depending on the search engine algorithms, whereas sponsored links are allocated through a deterministic auction.
It is noteworthy that the presence of sponsored links accentuates the results of the base model and that SEO favors the high-quality advertiser regardless of the correlation between quality and valuation. The intuition is that sponsored links act as a backup for high-quality advertisers in case they do not possess the top organic link. When consumers have lowsearch costs, they will eventually find the high-quality advertiser, reducing the value of the organic position for a low-quality player. In equilibrium, consumers will start searching on the organic side, and high-quality sites will have an increased chance of acquiring the organic link as SEO becomes more effective.
Although SEO clearly favors high-quality advertisers, we find that there is a strong tension between the interests of consumers and the search engine. As advertisers spend more on SEO and consumers are more likely to find what they are looking for on the organic side, they are less likely to click on revenue-generating sponsored links. This tension may explain why search engines take such a strong stance against SEO, even though they favor a similar mechanism on the sponsored side. Furthermore, we obtain an important normative result that could help search engines mitigate the revenue loss stemming from SEO: we find that there is an optimal minimum bid the search engine can set that is decreasing in the intensity of SEO. Setting the minimum bid too high, however, could drive more advertiser dollars away from the sponsored side toward SEO.
As common as the practice of SEO may be, research on the topic is scant. Many papers have focused on sponsored links and some on the interaction between the two lists. In all of these cases, however, the ranking of a website in the organic list is assumed exogenous, and the possibility of investing in SEO is ignored. On the topic of sponsored search, works such as those by Rutz and Bucklin (2007) and Ghose and Yang (2009) focus on consumer response to search advertising and the different characteristics that affect advertising efficiency. Other recent examples, such as those by Chen and He (2011), Athey and Ellison (2011), and Xu et al. (2011), analyze models that include both consumers and advertisers as active players.
A number of recent papers study the interplay between organic and sponsored lists. Katona and Sarvary (2010) show that the top organic sites may not have an incentive to bid for sponsored links. In an empirical piece, Yang and Ghose (2010) show that organic links have a positive effect on the click-through rates of paid links, potentially increasing profits. Taylor (2013), White (2013), and Xu et al. (2012) study how the incentives of the search engine to provide high-quality organic results are affected by potential losses on sponsored links. The general notion is that search engines have an incentive to provide lower-quality results in order to maximize revenues.
The work of Xing and Lin (2006) is the closest antecedent to our paper. It defines "algorithm quality" and "algorithm robustness" to describe the search engine's ability to accurately identify relevant websites. Their paper shows that when advertisers' valuations for organic links are high enough, SEO is sustainable, and SEO service providers can then free ride on the search engine as a result of their "parasitic nature." The relationship between advertiser qualities and valuations and the strategic nature of consumer search is not taken into account. An earlier work by Sen (2005) develops a theoretical model that examines the optimal strategy of mixing between investing in SEO and buying ad placements. It is noteworthy that the model shows that SEO should not exist as part of an equilibrium strategy.
