
Is Search Advertising a Giffen Good? - breily
http://anand.typepad.com/datawocky/2008/04/is-search-adver.html
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aneesh
It is a popular misconception that an increase in demand coupled with an
increase in price is sufficient to make a good a Giffen good. This is false.

First, the good must be inferior (demand decreases when income rises), which
search advertising is probably not. Second, the increase in demand must be
because the income effect (the increase in price acts like a decrease in
income, so you will buy more of the good since it is inferior) is greater than
the substitution effect (you will buy less of the good because its price
relative to substitute goods increased). It's not clear this is the mechanism
at work here.

Just because an increase in price causes an increase in demand doesn't make
search advertising a Giffen good. This is a necessary, but not sufficient
condition.

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anand_rajaraman
One could argue that search advertising is "inferior" to brand advertising in
the sense that it produces low-margin transactions and builds no brand
loyalty. Companies do it because they have to, in the meat-and-potatoes sense.
In the long run, loyal users created through a brand are more valuable.

Also, the increased spending on SEM does come from a limited marketing budget,
so there is a definite income effect.

Finally, Google keeps changing the SEM rules in ways that that result in price
increases, in addition to the auction effect.

Thus it would seem that all the Giffen good conditions are met.

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aneesh
But still, search advertising isn't an inferior good in the traditional sense.
All else constant, if a company gets an additional dollar of revenue, they
won't spend less on search advertising in absolute terms.

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prakash
very interesting analysis.

When I came to the part about google, funnily enough, it reminded me of Paul
Graham's "What the Bubble got right", specifically about Yahoo in Para's 2 &
3.

<http://www.paulgraham.com/bubble.html>

