A few years ago, Mohammad Zia was checking flight prices on Expedia. He was puzzled by a section of the website that prompted him to run the same search on competing travel websites, including Priceline and Orbitz.
“Instead of Expedia trying to keep me on its website and trying to sell me something, it was encouraging me to check out prices on these other travel websites, and some of these are very tough competitors,” Zia said. “I was thinking, ‘Why would a for-profit firm send its own customers, who are already in their store, to a competitor?’ ”
Zia, who recently completed his PhD in management science from the Naveen Jindal School of Management, decided to study this practice of in-store advertising by competitors. He and two other researchers at The University of Texas at Dallas noticed this is common across the web. Walmart.com, for instance, hosts banner ads for TVs from Sears or Fry’s Electronics to customers searching for TVs. And Amazon.com shows ads from competing retailers to online customers.
Search-based advertisement is generally a useful shopping tool that is accessible, targeted and helps customers find what they want quickly.
Search-based advertisement is generally a useful shopping tool that is accessible, targeted, and helps customers find what they want quickly, Zia said. It can also help searchers to pay less.
“Research has shown that there is a lot of price dispersion in online stores. If customers want to save money, they should search on many different platforms, especially with travel products like flights and hotels,” Zia said. “But of course there are customers who do not have time. That results in price dispersions and enables firms to increase their prices.
When a host store sells its in-store advertising space to a competitor, the “uninformed” customers become aware of similar items in the marketplace, Zia said, and potential customers could move to the competing store. But even then, the original store may benefit from a commission for customers it sends to the competitor.
For the study, the researchers used game theory to understand this marketing technique. Zia said he wanted to know under what conditions would allowing competitor advertising be a beneficial strategy.
“When some customers have search costs — including time, energy and money — it might be optimal for Expedia to increase its average price in order to motivate these customers to click on the link,” Zia said. “Because Priceline knows these customers have already observed high prices, that website also can raise prices. So the average prices will be higher on both stores.”
The study found that this kind of advertisement is not always an optimal solution. It works only if the commission rate is relatively high.
But the study found that this kind of advertisement is not always an optimal solution. It works only if the commission rate is relatively high. Only in that case, can it mitigate price competition and boost profits of both firms.
The resulting paper, co-authored by marketing professors Dr. Dmitri Kuksov and Dr. Ashutosh Prasad, is one chapter of Zia’s dissertation on multi-platform, search-based advertising. It was published in the May-June issue of Marketing Science.
Image courtesy of The University of Texas at Dallas.