An Empirical Analysis of Seller Advertising Strategies in an Online Marketplace

Online marketplaces are increasingly adopting innovative business models such as using paid advertising as a major revenue source. We explore the two popular advertising tools, sponsored search and social media endorsement, in attracting web traffic from online sellers’ perspective. We estimate an endogenous treatment model with latent variable to model online traffic given sellers’ decisions on employing different advertising strategies. We find evidence that both sponsored search and social media endorsement are significant in attracting traffic, after we control for seller self-selection behavior in choosing their strategies. Sponsored search has a higher impact on low-reputation sellers in bringing more traffic, and sellers with more return customers have higher benefit in using sponsored search in generating traffic. The findings are consistent with informative view of the advertising theory, and they provide interesting and import implications for both the platform and market participants.