Competing ‘Creatively’ in Sponsored Search Markets: The Effect of Rank, Differentiation Strategy, and Competition on Performance

Although efficiency‐enhancing features of online markets have been well studied, much less is known about firms' differentiation strategies in these competitive markets or the outcomes of such differentiation. This study examines competition among firms in online sponsored search markets–one of the fastest growing and most competitive of online markets. We develop and test a model that predicts the clickthrough rate (CTR) of a seller's listing in a sponsored search setting. Drawing on consumer search theory and competitive positioning strategies, we theorize that CTR is jointly driven by a seller's positioning strategy as reflected by the unique selling proposition (USP) in its ‘ad creative,’ by its rank in a sponsored search listing, and by the nature of competition around the focal firm's listing. We use data from a field experiment conducted by a leading firm in the mortgage industry where the firm varied its rank and USP dynamically. Results suggest that sponsored search listings can act as effective customer segmentation mechanisms, consistent with a model of consumer search in directional markets. We further find that the effect on CTR of a firm's positioning strategy and its rank in a listing is strongly moderated by its ability to differentiate itself from adjacent rivals. We discuss the implications of our findings for sellers' strategies in sponsored search markets and for extending the understanding of consumer search behavior in directional markets.