Power of Haas Ideas

Paid Search Doesn’t Pay

Study questions a multibillion-dollar online ad model

By Pamela Tom

Businesses spend billions to reach customers through paid online search advertising, but just how effective is it? Using data from eBay, Associate Professor Steven Tadelis investigated whether consumers are more likely to click on paid ads than on free, generic search results. The answer: no.

“We found that when you turn off the paid advertising, almost all of the traffic that came through the paid search is just substituted by the other free channels,” says Tadelis.

Tadelis conducted the study, “Consumer Heterogeneity and Paid Search Effectiveness: A Large Scale Field Experiment,” at eBay with co-authors Thomas Blake, an economist in the economics research team that Tadelis started at eBay, and former eBay economist Chris Nosko of the University of Chicago.

To measure the effectiveness of paid search, Tadelis and his co-authors turned off eBay’s paid search in 68 areas in the United States. If a consumer typed in the search term “white blouse” online in these markets, she would not see any retail ads by eBay for “white blouse” but only from other advertisers who bid on the “white blouse” keywords.

At the end of 60 days, Tadelis and his colleagues compared sales of two groups: one that received no paid search results and another in which paid search remained untouched. Again, consumer sales as a result of the paid search showed no measurable increase from those who made purchases via unpaid channels (such as organic searches, or directly visiting

To ensure the robustness of their results, the researchers eliminated eBay’s paid keyword searches throughout the country in a second experiment and then compared sales for that period to an equivalent period with paid search on.

“If advertising is indeed a strong driver of sales, we should have seen sales plummet,” says Tadelis. “But the impact on sales was indistinguishable and not significantly different than zero.”

Furthermore, for “brand” keywords such as “eBay” or other company name keywords, paid ads sit just above the generic search results. For example, a search for “Macy’s” results in a Macy’s free search below the Macys paid ad. Consequently, Tadelis says the paid search result adds no additional benefit to the advertiser. “It’s not that clicking on the result caused engagement, it’s that the intent to engage caused people to click on it,” says Tadelis.

On any given day advertisers, including eBay, bid on millions of keywords. Tadelis hopes this work will encourage other e-commerce businesses to conduct this type of microeconomic research to better measure the impact of paid search traffic on the web.

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