Pricing and Bidding Strategy in AdWords Auction under Heterogeneous Products Scenario

Abstract

This paper focus on biding and pricing strategies in a scenario twoheterogeneous products manufacturers selling through on-line channel. The firms competes customers in quality to price ratio. The value of prominent AdWords advertising position and the resulting price dispersion patterns are studied. We found that prominent position of an Ad words is not always favorite to all firms according to the analysis based on game theory. For the firm which produced high-quality products, the revenue gained from listed on the prominent place is always higher than in the second place; However, for the low-quality product firm the revenue gained from its advertisement listed on the prominent place might less than on the second place. Meanwhile the attractiveness of the prominent Ad place depends on the market structure in terms of consumer preference and consumer search behavior. The more consumers purchase from the firm listed in the prominent Ad places or the more consumers prefer high-quality product the more strict area in which the low-quality product manufacture has positive profit.

This work was supported by the National Natural Science Foundation of China (NSFC Grant Nos.70602031).