29 Apr 2013Working Paper Summaries

Exclusive Preferential Placement as Search Diversion: Evidence from Flight Search

by Benjamin G. Edelman and Zhenyu Lai

Measuring the net effect of search diversion is important for understanding the extent to which search engines and other intermediaries may act to influence consumer behavior. This paper makes two contributions. First, the authors develop a theoretical model to establish conditions when a search engine chooses to divert search to a less relevant service. Results indicate that search engines have a larger incentive to divert search when they are able to alter the consumers' perceptions of the difference between non-paid and paid placements, and when search engines place a large weight on revenue. These results are consistent with instances where some search engines have labeled paid links with confusing euphemisms or not at all, and where some search engines have mixed paid and non-paid links in the same area of the screen. Second, the authors measure the impact of a diversion mechanism where a search engine exclusively awards a non-paid preferred placement slot to its own service. Specifically, they examine Google's preferred placement of Flight Search. Analysis indicates that there was an 85 percent increase in click-through rates for paid advertising and a 65 percent decrease in click-through rates for non-paid algorithmic search traffic to competing online travel agencies. Both changes are statistically significant, providing evidence of Google's ability to influence how consumers choose services after they search. Key concepts include:

There are significant cost increases for Internet startups that obtain large quantities of incoming traffic from search engines. These increases in costs could deter entry into thriving online industries.
Search diversion particularly harms the sites that provide services most relevant to users' search queries.

Author Abstract

We analyze the incentives for a two-sided intermediary to divert consumers to its favored destinations. Using a quasi-experiment to control for search intent, we identify and measure the impact of a search engine's exclusive award of preferential placement to its own service. We find that Google's differential placement of its Flight Search service led to a 65% decrease in click-through rates for non-paid algorithmic links and an 85% increase in click-through rates for paid advertising listings of competing online travel agencies. Moreover, the exclusive integration of search engine services into search results disproportionately impacted traffic to popular destinations.