UCLA

In this dissertation I explore consumer perceptions towards sponsored listings, a digital marketing innovation. Chapter 1, shares the background details that provide the motivation for my dissertation. In the first essay (chapter 2), I note that consumer perceptions of these digital ads are influenced by a signal of quality due to the sponsored status and by a bias against it due to a natural preference for organic (``non-sponsored") listings. In this essay I propose to reconcile these opposing mechanisms and analyze, from a consumer behavior perspective, the evolution of the combined effect of these two mechanisms. In doing so I am able to address how the presence of sponsored listings affect consumers' engagement with the online marketplace. Using reduced form models, I first show evidence to support the presence of these two opposing mechanisms and then show how the net combination of these two mechanisms manifests in the empirical context of online hotel bookings. I then estimate a structural model of sequential search to rationalize the combined effect, while accounting for potential endogeneity bias due to targeted advertising. Using counterfactual analysis I compare how sponsored listings fare against organic listings towards consumer engagement with the online marketplace. I find that if sponsored listings are replaced with organic listings at the top of the page, then (a) the total clicks are likely to improve by 34\% and 30\% on laptops and mobiles respectively and, (b) conditional on clicking, the booking rate is likely to improve by 44\% and 39\% on laptops and mobiles respectively. Additionally, consumer engagement with the online marketplace is at its optimal best with organic listings at the top ranks and sponsored listings at the middle

amp; lower ranks. As search cost increases, I find evidence that sponsored listings play a direct information role and become valuable for all concerned (marketplace, consumer and seller). Finally, I find that consumer welfare is higher under the marketplace assigned ranking with only organic listings (and no sponsored advertising In the second essay (chapter 3), I investigate the mechanism(s) behind these sponsored advertisements and assess the impact of sponsored listings along the consumer shopping and purchase process. I do this using a structural model of consumer sequential search and a novel data set from an online travel agent. Since online marketplaces return rank ordered lists in response to consumer searches, I assume that based on historical browsing, consumers form priors regarding the quality at each rank. In response to the noisy signal of quality conveyed by sponsored ads, consumers are assumed to update their quality priors in a Bayesian fashion. I find that sponsored listings induced rank (position) change has a major impact on user awareness and that advertisers use sponsored listings for not just lift but also for prominent locations where consumer attention experiences spikes. I also find that advertising disclosure associated with sponsored listings has an impact, so that consumer consideration and choice probabilities are impacted at the top ranks (positions) of a page. This is however not the case at other ranks (positions) further down the page.