Economics of Internet Search, The

Networks, the Internet, and Cloud Computing, Internet and Search and Advertising

Article Snapshot


Hal R. Varian


Lecture, Rome, 2007


This slide presentation explores the history of Google and how search engines make money.

Policy Relevance

Several different search engines are likely to continue to exist in the market, because there is no reason that there would be only one.

Main Points

  • Search engines are highly profitable. Profits come from selling advertising related to the terms that users type into the search engine.

  • Online ads are more effective than conventional advertising because they are relevant to the user, but even so users click on only 2% of the ads.

  • Entry costs for the search engine business are large, but user can easily switch to another search engine. It is likely that there will be only a few large search engines for every group of users that speak the same language.

  • When Google was founded, its founders had no idea how they were going to make money, but online businesses can experiment easily. Finally they adopted the method of auctioning the right to show an ad when certain keywords were used.

  • Google makes more money from oversold pages with many bidders, but still makes some money on undersold pages.

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