Author(s)
Source
Working Paper, 2008
Summary
This paper looks at how ads shown by search engines like Google affect consumers.
Policy Relevance
As long as search engines compete, the system they use to place online ads is likely to lead to consumer benefits.
Main Points
- Advertisers bid on the keywords that consumers use for online searches on Google, Yahoo! and Microsoft’s search engines. Search engines also sort ads by quality.
- As long as search engines compete, they have reason to try to help consumers by offering ads that are likely to meet consumer needs. But a search engine focused on maximizing short run profits will benefit consumers less.
- Consumers and search engines can benefit when the auctioneer screens out low quality ads by refusing to list ads when bids are all below a minimum level (a “reserve price”).
- Consumers are more likely to click on ads, helping everyone. Consumers do not share advertiser or search engine profits, so they click too infrequently.
- Advertisers and the search engine are likely to be in conflict on whether to set reserve prices low or high. If search engines earn more revenues, advertisers get less.
- Search engines could benefit from setting different reserve prices for each page position, but these are not likely to occur in real auctions.
- Google and Yahoo now both rank ads not only in order of bids, but also by how likely consumers are to click (ad quality, or “click-weighted” auctions).
- Bidders like Nextag and eBay offering general sites might win too often.
- Bidders might use misleading ads to attract clicks even when they cannot satisfy consumers’ needs. Without click-weighting, misguided clicks cost firms more.
- If advertisers paid search engines only when consumers actually buy (a “pay-per-action” system) advertisers would also have reason to mislead consumers.