Comparison of allocation rules for paid placement advertising in search engines

Web sites such as Internet search engines, web portals, and comparison shopping services, aim to provide information or recommendations to users who might be searching for information or trying to make a purchase decision. Paid placement advertising has established itself as an important revenue resource for such information-oriented web sites, which often deliberately bias their recommendations (or sequence of results) in return for a fee from providers who wish to get preferential placement on the results page. This article examines the paid-placement ranking strategies of the two dominant firms in this industry, and compares their revenues under different scenarios via computational simulation. We find that ranking paid placement links by the product of willingness to pay and relevance is better, in most cases, than ranking by willingness to pay alone, which performs best only when the correlation between the provider's relevance and willingness to pay is large. We also analyze the impact of the competition for placement slots on placement revenues under these mechanisms.