Search Advertising

This article investigates the role of a search engine as an intermediary between firms and consumers. Search engines enable firms to target consumers who have revealed some specific needs through their query. In a framework with horizontal product differentia-tion, imperfect product information and in which consumers incur search costs, I show that introducing a mechanism which enables firms to target consumers reduces social inefficiencies. A profit maximizing search engine has incentives to design the matching mechanism so as to soften price competition between firms, in order to extract profit from them. In many cases, this implies lowering the accuracy of the matching mechanism