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The theory of sponsored search has been developing rapidly although with disagreement in scientific circles on answers to some basic questions about sponsored search. This study focuses on two of these questions, namely, if a search engine seeks to maximize profits, 1) what should its pricing policy be and 2) what should its ranking policy be. This paper uses experiments with economically motivated human subjects to address these questions. We evaluate six different sponsored search auction formats with two different pricing policies (Pay-per-transaction & Pay-per-click) and three different ranking policies (Rank by relevance, Rank by click-through rate, & Rank by both relevance and click-through rate). Our results suggest that Pay-per-click is superior and the reason behind its superiority is behavioral in nature whereas the ranking policy has significant effect on search engine revenue and advertiser profit.

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Experimental Evaluation of Sponsored Search Auction Mechanisms

The theory of sponsored search has been developing rapidly although with disagreement in scientific circles on answers to some basic questions about sponsored search. This study focuses on two of these questions, namely, if a search engine seeks to maximize profits, 1) what should its pricing policy be and 2) what should its ranking policy be. This paper uses experiments with economically motivated human subjects to address these questions. We evaluate six different sponsored search auction formats with two different pricing policies (Pay-per-transaction & Pay-per-click) and three different ranking policies (Rank by relevance, Rank by click-through rate, & Rank by both relevance and click-through rate). Our results suggest that Pay-per-click is superior and the reason behind its superiority is behavioral in nature whereas the ranking policy has significant effect on search engine revenue and advertiser profit.