Direct and Indirect Effects of Buyers and Sellers on Search Advertising Revenues in Business-to-Business Electronic Platforms

Abstract

Platform companies such as Alibaba.com increasingly rely on search advertising as a revenue source. This study examines (1) the direct effect of new and existing buyers and sellers on platform advertising revenue, (2) their indirect effect through two intermediary performance variables (buyer's click rate and seller's click price), and (3) how the effects differ between launch and mature stages of the search advertising service. Unique data collected from a leading transactional business-to-business electronic platform suggest that new buyers click on more search advertisements than existing buyers, especially after the firm's buyers and sellers have learned and adapted to the service (mature stage). New sellers tend to outbid existing sellers in the mature stage, but the opposite is true when the service is newly introduced (launch stage). Because existing sellers can more effectively send quality signals in the launch stage, attracting existing, rather than new, sellers has a greater effect on click rate in the launch stage; however, the opposite is true in the mature stage. Attracting new buyers also has a greater effect on click rate and price, especially in the mature stage. Finally, using cost data from the platform, this article examines the economic returns of attracting new and existing buyers and sellers with respect to advertising revenue.