Allocating expenditures across keywords in search advertising

An increasingly popular venue for advertisers is the keyword advertising on the web pages of search engines. Advertisers bid for keywords, where bid price determines ad placement, which in turn affects the response function, defined as the click-through rate. Advertisers typically have a fixed daily budget that should not be exceeded, so an advertiser must allocate the budget as productively as possible by selecting which keywords to use and then deciding how much to allocate for each keyword. We construct and examine a model for this selection and allocation process.