UC Berkeley

This paper examines the impact of search engine optimization (SEO) on the competition between advertisers for organic and sponsored search results. The results show that a positive level of search engine optimization may improve the search engine's ranking quality and thus the satisfaction of its visitors. In the absence of sponsored links, the organic ranking is improved by SEO if and only if the quality provided by a website is sufficiently positively correlated with its valuation for consumers. In the presence of sponsored links, the results are accentuated and hold regardless of the correlation. When sponsored links serve as a second chance to acquire clicks from the search engine, low-quality websites have a reduced incentive to invest in SEO, giving an advantage to their high-quality counterparts. As a result of the high expected quality on the organic side, consumers begin their search with an organic click. Although SEO can improve consumer welfare and the payoff of high-quality sites, we find that the search engine's revenues are typically lower when advertisers spend more on SEO and thus less on sponsored links. Modeling the impact of the minimum bid set by the search engine reveals an inverse U-shaped relationship between the minimum bid and search engine profits, suggesting an optimal minimum bid that is decreasing in the level of SEO activity. © 2013 INFORMS.