Systemic Concentration in Sponsored Search Markets

Abstract

Keyword-based search engine advertising markets on the Internet, referred to as Sponsored Search Markets (SSMs), have reduced entry barriers to advertising for niche players. Known empirical research, though scant and emerging, suggests that while these markets provided niche firms with greater access, they do exhibit high levels of concentration—a phenomenon that warrants further study. This research, using agent-based simulation of SSM, investigates the role of “market rules” and “advertiser practices” in generating emergent click share heterogeneity among advertisers in an industry. SSMs often rank ads based on the click-through rate (CTR) that gives rise to reinforcing dynamics at an individual keyword level. In the presence of spillovers arising from advertisers’ practice of managing keyword bids with a cost cap operating on the keyword portfolio, these reinforcing dynamics can endogenously generate industry-level concentration. Analysis of counterfactual markets with different window sizes used to compute CTR reveals that industry-level concentration bears an inverted-“U” relationship with window size.