Sponsored Search and Product Market Concentration

This paper examines how sponsored search auctions shape product market competition. I develop a model in which firms bid for prominence on a platform and set prices, under a cost-per-click commission model. Consumers observe prices before search but incur costs to learn match values. The analysis reveals a novel mechanism: ad commissions pass through asymmetrically to prices. For the prominent firm, commissions function like a fixed cost, leaving its price largely unaffected; for the non-prominent firm, they act as a marginal cost, raising its price. This asymmetry reduces competition and can even reverse price rankings. I explore alternative commission models and provide suggestive empirical evidence consistent with the theory. The paper also provides suggestive empirical evidence from a US digital platform consistent with the theoretical predictions.<br>