Optimal dynamic pricing for sponsored search advertising

This paper studies a novel posted pricing business model among Asian search engines for selling sponsored positions to advertisers. The unique feature of bump-up process to eliminate unoccupied positions creates quality uncertainty from the advertisers’ viewpoints. We establish the existence of a Markov perfect equilibrium, and characterize the optimal posted prices in this dynamic selling context. We show that creating quality uncertainty unambiguously boosts the search engine’s profitability. Our analysis applies to the cases with random deadlines and finite population of advertisers.