An auction model arising from an Internet search service provider

Most search service providers such as Lycos and Google either produce irrelevant search results or unstructured company listings to the consumers. To overcome these two shortcomings, search service providers such as GoTo.com have developed mechanisms for firms to advertise their services and for consumers to search for the right services. To provide relevant search results, each firm who wishes to advertise at the GoTo site must specify a set of keywords. To develop structured company listings, each firm bids for priority listing in the search results that appear on the GoTo site. Since the search results appear in descending order of bid price, each firm has some control over the order in which the firm appears on the list resulting from the search. In this paper, we present a one-stage game for two firms that captures the advertising mechanism of a search service provider (such as GoTo). This model enables us to examine the firm’s optimal bidding strategy and evaluate the impact of various parameters on the firm’s strategy. Moreover, we analyze the conditions under which all firms would increase their bids at the equilibrium. These conditions could be helpful to the service provider when developing mechanisms to entice firms to submit higher bids.