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creases substantially. Interestingly, we find the solicitation restrictions only matter when it is especially difficult to locate clients. These restrictions only affect prices when there are relatively few searches for that keyword in that location. If there are many people searching for that string, and therefore many potential customers, then the restriction on offline targeting does not matter. Search engine advertising is most valuable when firms have just a few hard-to-reach customers. Therefore, it is match difficulty that is driving the relationship between ad prices and the regulation.
To ensure our results were reliable, we performed a battery of statistical tests. We tried different definitions of personal injury. Also, it could be that the results are driven by the underlying, unobserved condition of commerce of a particular state, and not by people’s real advertising choices. For example, the state’s personal injury attorneys could be systematically more aggressive at pursuing customer leads than regular attorneys, which could lead both to their valuing leads more and their being regulated more by that state. So, to make sure our result is real, we performed a “falsification test.”
We chose a type of law that was similarly motivated, but that would not increase the price paid for ads. This was a type of law that set limits on lawyers taking cases on a contingency fee basis. In states with contingency fee limits, personal injury lawyers paid relatively less for personal injury keywords compared to other legal keywords. So, the falsification test reassures us that there was not something about states
that enact lawyer regulations that can provide an alternative explanation of our results.
We show that targeting generates the most value in small markets, where the ability to target using traditional direct response media is limited. We provide clear empirical evidence of the extent to which advertisers value context-based advertising’s ability to target very narrow markets. This enables a “long tail of advertising” that is not feasible under the traditional broadcast advertising model. Whether customers are difficult to find because there are few of them or because it is costly to communicate with them, search engine advertising helps firms overcome these challenges and therefore generates considerable value to firms, customers, and (of course) the search engines themselves.
The profitability of search markets for search engines is highly dependent on the availability of alternative marketing communications channels both online and offline. It is therefore not clear that extending electronic auctions to other advertising networks without context-based advertising in place will necessarily be profitable. For example, it is not clear that Google’s plans to bring online auctions to TV advertising and conduct these auctions on the basis of “daypart, geography and […] demographic,” will prove as successful as its prior online search auctions that are conducted using specific context-based pricing and extreme micro-targeting.
We have illustrated this process on lawyers because it is convenient to do so, but there is nothing to suggest the results are unique to legal advertising. We believe we will see similar spreads in prices for local market services in which online advertising permits a high level of targeting.
Reference
1. Goldfarb, a. and tucker, C. Search Engine Advertising: Pricing Ads to Context. net institute Working paper #07–23, 2008.
Avi Goldfarb ( agoldfarb@rotman.utoronto.ca) is an assistant professor of marketing at the Joseph l. rotman school of management at the university of toronto.
Catherine Tucker ( cetucker@mit.edu) is the douglas drane Career development professor in it and management and an assistant professor of marketing at the mit sloan school of management.
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