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To Place Better Or Price Cheaper? Bidding And Pricing Under Keyword Advertising

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Executive Summary

This paper considers an integrated game-theoretic model in which firms compete for advertising positions and then compete in price for customers in a product market. Positions are differentiated in their prominence and firms differ in their competence. The authors use this framework to endogenously evaluate the value of a prominent advertising position, and examine the competition outcome and the resulting price dispersion patterns. They find that a prominent advertising position may or may not be desirable for a firm with competitive advantage, depending on market structure and consumers' search pattern.

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