Sponsored Search Marketing: Dynamic Pricing and Advertising for an Online Retailer
2013, forthcoming Management Science
S. Ye, G. Aydin, S. Hu
Consider a retailer using sponsored search marketing together with dynamic pricing. The retailer’s bid on a search keyword aﬀects the retailer’s rank among the search results. The higher the rank, the higher the customer traﬃc and the customers’ willingness-to-pay will be. Thus, the question arises: When a retailer bids higher to attract more customers, should the accompanying price also decrease (to strengthen the bid’s eﬀect on demand) or increase (to take advantage of higher willingness-to-pay)? We ﬁnd that the answer depends on how fast the retailer increases its bid. In particular, as the end of the season approaches, the optimal bid exhibits smooth increases followed by big jumps. The optimal price increases only when the optimal bid increases sharply, including the instances where the bid jumps up. Such big jumps arise, for example, when the customer traﬃc is an S-shaped function of the retailer’s bid.
Ye, S., G. Aydin, and S. Hu (2013), “Sponsored Search Marketing: Dynamic Pricing and Advertising for an Online Retailer,” accepted for publication in Management Science.
sponsored search marketing, dynamic pricing