Barry Nalebuff is an entrepreneur who has recently launched a bottled organic tea brand called
(which can be bought online). He has decided to bid on the Google keyword,
"Healthy Beverage," and would like to know how much to bid on this keyword. For this purpose,
he decides to use the PROSAD decision support system. Barry learns from Google that 30,000
daily searches happen, on average, on the Google keyword, "Healthy Beverage." Suppose that
among the people who both search on the keyword "Healthy Beverage" on a given day and also
then click on Barry's sponsored ad, 0.25 % are successfully acquired (i.e., become customers of
Honest Tea). Suppose further that the annual profit contribution to Barry per acquired customer
a. Barry Nalebuff wants to invest in tracking online clickstream data using Google Analytics
and, therefore, understanding the impact of various ranks on clicks. Right now, before
having gathered such online data, what would be a conservative bid for Barry Nalebuff
to make for the Google keyword, "Healthy Beverage"? Explain your answer.
b. Over the first quarter of launch, Barry subjectively revises his bids on the Google
keyword, "Healthy Beverage" on a daily basis. As his bids change, his sponsored ad's
rank changes and, therefore, the clicks on his sponsored ad change as well. Based on the
data collected during the first quarter (using Google Analytics software), Barry estimates
the relationship between click-through rate (CTR) and sponsored ad rank, and it is as
follows: ln (CTR) = 0.5 - 0.4205 * RANK. Barry also estimates the relationship between
cost-per-click (CPC) and sponsored ad rank, and it is as follows: ln (CPC) = 0.75 - 0.1035
* RANK. Which increases at a faster rate going from an inferior rank (say, X+1) to a
superior rank (say, X): click-through-rate or cost-per-click? Does this imply that Barry's
optimal bid for the keyword "Healthy Beverage" would be higher than, or lower than
the conservative bid, calculated in question 7 (a) ? Why?
c. Suppose Barry Nalebuff bids the optimal bid for the Google keyword, "Healthy
Beverage" as recommended by the PROSAD decision support system. What rank would
he obtain for such a bid?
d. What would be the transactional profit that Barry Nalebuff obtains from the above bid?
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