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To make the problem meaningful, we require that at least the highest valuation user ( 22#22) will use the search engine when there is no paid placement, i.e., that 23#23. The search engine benefits content providers by directing users to their sites. Content providers are heterogeneous in their profit expectations, which is a function of the search engine's market coverage 8#8. Providers have a choice between regular placement (which provides a value 24#24 at no cost) and paid placement (which provides value 18#18 at cost 12#12). Rational providers will choose paid placement if and only if 25#25 i.e., 26#26. Hence the fraction of providers who choose paid placement is
The search engine obtains revenues from two sources, third party firms and paid placement. The first type of revenue 28#28 is a function of the search engine's market coverage, 8#8, and profit rate brought by each user, a. If 8#8 is interpreted as the number of queries to the search engine, a may be considered as the rate per impression. Hence
The search engine's placement revenue 30#30 is 31#31. Substituting for 8#8 and rearranging terms, we get
The search engine's total profits are 33#33, and it aims to choose the optimal fraction of paid placement 1 - x - alternately, the optimal degree of independence, x - in order to maximize 34#34.
Next: Literature Review Up: Model of Search Engines' Previous: Effect of Paid Placement Juan Feng