A Model of Search Intermediaries and Paid Referrals

A Model of Search Intermediaries and Paid Referrals

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Article ID: iaor200916659
Country: United States
Volume: 18
Issue: 4
Start Page Number: 414
End Page Number: 436
Publication Date: Dec 2007
Journal: Information Systems Research
Authors: ,
Keywords: search
Abstract:

In this paper we pursue three main objectives: (1) to develop a model of an intermediated search market in which matching between consumers and firms takes place primarily via paid referrals; (2) to address the question of designing a suitable mechanism for selling referrals to firms; and (3) to characterize and analyze the firms' bidding strategies given consumers' equilibrium search behavior. To achieve these objectives we develop a two–stage model of search intermediaries in a vertically differentiated product market. In the first stage an intermediary chooses a search engine design that specifies to which extent a firm's search rank is determined by its bid and to which extent it is determined by the product offering's performance. In the second stage, based on the search engine design, competing firms place their open bids to be paid for each referral by the search engine. We find that the revenue–maximizing search engine design bases rankings on a weighted average of product performance and bid amount.

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