A Dynamic Model of Sponsored Search Advertising Song Yao Carl F. Mela 1 September 15, 2010 1 Song Yao (email: [email protected], phone: 847-467-2767) is an Assistant Professor of Marketing at the Kellogg School of Management, Northwestern University, Evanston, Illinois, 60208. Carl F. Mela (email: [email protected], phone: 919-660-7767, fax: 919-681-6245) is a Professor of Marketing, The Fuqua School of Business, Duke University, Durham, North Carolina, 27708. The authors would like to thank seminar participants at Cornell University, Dartmouth College, Duke University, Emory University, Erasmus University, Georgia Institute of Technology, Georgia State University, Harvard Business School, INSEAD, London Business School, New York University, Northwestern University, Ohio State University, Rice University, Stanford University, University of British Columbia, University of California at Berkeley, University of California at Davis, University of California at Riverside, University of Chicago, University of Maryland, University of Rochester, University of Southern California, University of Texas, University of Tilburg, University of Wisconsin, Yale University, and the 2008 Marketing Science Conference, NET Institute Conference 2009, NBER Summer Institute 2009, AMA Summer Conference 2009 as well as J.P. Dubé, Wes Hartmann, Günter Hitsch, Han Hong, Wagner Kamakura, Anja Lambrecht, Andrés Musalem, Harikesh Nair, Peter Rossi and Rick Staelin for their feedback. We gratefully acknowledge financial support from the NET Institute (www.netinst.org) and the Kauffman Foundation.