Competitive Poaching in Sponsored Search Advertising and Its Strategic Impact on Traditional Advertising

Abstract

Traditional advertising, such as TV and print advertising, primarily builds awareness of a firm's product among consumers, whereas sponsored search advertising on a search engine can target consumers closer to making a purchase because they reveal their interest by searching for a relevant keyword. Increased consumer targetability in sponsored search advertising induces a firm to “poach” a competing firm's consumers by directly advertising on the competing firm's keywords; in other words, the poaching firm tries to obtain more than its “fair share” of sales through sponsored search advertising by free riding on the market created by the firm being poached. Using a game theory model with firms of different advertising budgets, we study the phenomenon of poaching, its impact on how firms allocate their advertising budgets to traditional and sponsored search advertising, and the search engine's policy on poaching. We find that, as budget asymmetry increases, the smaller-budget firm poaches more on the keywords of the larger-budget firm. This may induce the larger-budget firm to allocate more of its budget to traditional advertising, which, in turn, hurts the search engine's advertising revenues. Therefore, paradoxically, even though poaching increases competition in sponsored search advertising, the search engine can benefit from limiting the extent of poaching. This explains why major search engines use “ad relevance” measures to handicap poaching on trademarked keywords.