Web sites invest significant resources in trying to influence their visibility among online search results. In addition to paying for sponsored links, they invest in methods known as search engine optimization (SEO) that improve the ranking of a site among the search results without improving its quality. We study the economic incentives of Web sites to invest in SEO and itsimplications on search engine and advertiser payoffs. We find that the process is equivalent to an all-pay auction with noise and headstarts. Our results show that, under certain conditions, a positive level of search engine optimization improves the search engine's ranking quality and thus the satisfaction of its visitors. In particular, if the quality of sites coincides with their valuation for visitors then search engine optimization serves as a mechanism that improves the ranking by correcting measurement errors. While this benefits consumers and increases traffic to the search engine, sites participating in search engine optimization could be worse off due towasteful spending unless their valuation for traffic is very high. We also investigate how searchengine optimization affects the revenues from sponsored links. Surprisingly, we find that in many cases search engine revenues are increased by SEO.
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