NEW YORK – Marketers are spending a lot of money on sponsored ads on online marketplaces to help customers find and buy their products. According to eMarketer, almost $12 billion will be spent on digital advertising in the United States this year alone on Amazon. What is the impact of these ads on consumer choice, on the profit of the marketplace, and on the sales of marketers? New research supported by The Chazen Institute at Columbia Business School finds that, depending on the product category, sponsored listings can actually enhance the effectiveness of consumer searches, and increase sales conversion rates as well as marketplace profit.
Columbia Business School Professor Kinshuk Jerath and co-authors from the University of California, Irvine, and Carnegie Mellon University analyzed data from more than two million users on FlipKart, India’s largest online marketplace, using the most popular product categories: clothing and electronics. These two categories account for approximately 90 percent of sales on FlipKart. Their findings shed light on the effectiveness of sponsored listings, which allow sellers to promote listings in search results by artificially increasing their ranking, as compared to the organic listings they displace, and how this varies by product category.
When the information gap between the seller and buyer is high, as is the case with clothing because the marketplace finds it difficult to rank products with mostly non-digital attributes, sponsored listings can help to close the gap by identifying products most relevant to the consumer’s search. The researchers find that clothing ads perform better than subsequent organic listings — up to 25 percent better in some cases.
But for a category like electronics, where the information gap is low because there is much information available online — on manufacturer sites, for example — sponsored ads typically perform worse than the displaced organic listings, receiving 5 to 20 percent fewer clicks, and 25 to 30 percent fewer conversions.
However, even when the information gap is low and ads perform poorly, there is a positive effect on succeeding search results that compensates for the marketplace’s lost revenue from poorly-performing ads. Ultimately, the researchers find the total effect of sponsored ads on consumer search outcomes as well as marketplace profit to be positive for high information gap categories like clothing and negligible for low information gap categories like electronics. Sellers, however, see greater sales for advertised products in both categories.
The paper has several important implications for managers of e-commerce marketplaces:
- Regardless of the product category and performance of the ads, sponsored products are adding an additional revenue stream for online marketplaces. These marketplaces collect revenue from the ads themselves, besides the commission that they get paid whenever a product is sold.
- Sponsored listings are helping e-commerce marketplaces identify marketable new products and monetize this exploration phase, particularly for goods with non-digital attributes like clothing.
- Managers of e-commerce marketplaces who are concerned about the consumer experience and long-run value of the marketplace should consider using relevance to decide the winner of the keyword auctions in searches related to product categories with more digital attributes like electronics. In the case of pricing, managers can charge lower prices to sellers of more relevant listings to do some quality control.
The paper, “Information Asymmetry and Relevance of Sponsored Listings in Online Marketplaces,” is authored by Kinshuk Jerath, Associate Professor of Business at Columbia Business School; Vibhanshu Abhishek, Associate Professor of Information Systems at the University of California, Irvine; and Siddhartha Sharma, PhD student at Carnegie Mellon University.
For more research supported by The Chazen Institute, please click here.
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About the Jerome A. Chazen Institute for Global Business
The Jerome A. Chazen Institute for Global Business is the interdisciplinary hub of global business knowledge at Columbia Business School. By injecting a global viewpoint into coursework, supporting research on global business, and sponsoring provocative forums where business leaders and policy-makers engage in vigorous debate, we pool the vast wealth of knowledge that exists within Columbia Business School, distill it for people who operate in the world’s marketplace, and provide a global network for lifelong learning.