The Role of Keyword Advertising in Competition Among Rival Brands

David Evans, Elisa Mariscal, Sep 13, 2012

A consumer types the name of a brand into a search engine. In most cases, the search-results page shows two sets of results: “organic search results” and “sponsored links” or “ads.” The results in the middle of the page are the “organic search results” and they contain a set of links related to the brand itself as well as links to similar products that might be relevant to the consumer’s query. The search result page might also show “sponsored links,” which are advertisements that appear on the top and to the right of organic search results. These advertisements often contain links to the brand and to places where consumers can buy the brand. The sponsored links are generated through the keyword-bidding process used by search engines to sell ad space on the search-results page.

If a competitor to the brand, like the brand itself, bids on the brand-name keyword, their ads could also appear as sponsored links. The position of the competitor advertisement on the search-results page, including whether its advertisement is presented at all, depends in part on whether the ad is relevant to a user’s query, which is measured in part by the number of clicks the ad is likely to get, and on how much the advertiser bids on the brand-name keyword. As a result, when a consumer queries “Gucci handbag” in a search engine, she may end up seeing organic results and sponsored links for Kate Spade handbags in addition to Gucci-related links.

Should courts prohibit or limit this sort of keyword advertising against competitors? Similar questions are being posed around the world as a result of complaints by companies that search engines are infringing on the trademarks of brand holders and confusing consumers. For example, the Australian Competition and Consumer Protection Commission (“ACCC”) brought a case against Google in connection with the sponsored links it sells to advertisers. The case arose in part because some advertisers had bid on their competitors’ names as keywords and their competitor names appeared in the heading of the advertisers’ sponsored link. The ACCC alleged that Google was responsible for the content of these advertisements and that they were likely to mislead consumers in violation of Australian consumer protection law.

This article argues that courts and regulators should be careful about limiting advertising by competitors in this situation. There is extensive empirical evidence that consumers are harmed, as a result of higher prices and poorer products, from restrictions on the ability of firms to show consumers informative and comparative advertisements. Over the last two decades, competition authorities, courts, and legislatures have looked skeptically at efforts by firms to limit advertising by their competitors. At the same time, there is a strong presumption that consumers benefit when they obtain information on competing products in response to a query about a particular brand. Such comparative information is what consumers are often looking for and what search engines have strong financial incentives to provide.

In addition, harm from advertising restrictions is not limited to consumers. Businesses have a keen interest in identifying who their competitors are selling to and trying to persuade those customers to switch. That is the essence of competition. Using brand names as part of keyword advertising makes it easier for firms to find consumers who would be interested in learning about their product. It thereby increases the intensity of competition for customers.

Companies can abuse keyword advertising just like any other form of advertising, but there are well-developed legal and enforcement policies to deal with companies that try to mislead and deceive consumers. Regulators need to strike a proper balance between, on the one hand, encouraging competition for consumers, including allowing messages that allow consumers to compare one product with another and, on the other hand, protecting consumers from misleading and deceptive ads while protecting brands from dilution of their trademarks. In striking that balance, courts and regulators should recognize the very important contribution that informative comparative advertising makes to competition.

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