Competition for Google AdWords

1. Competition for Google AdWords A P EEP 142 4/13/06

2. Company Overview • incorporated in 1998 • stock valuation over $100 billion • $6.1 billion revenue in 2005 • $1.5 billion accounting profits in 2005

3. Two main advertising programs • AdWords • Ads on search results pages, either above “organic listings” in a gray box or on the side of the page • Targeted to keywords searched • AdSense • Ads appearing on other websites • Generates $2.7 billion/year, but site host keeps about 80%

4. AdWords basic policies • Custom, local, regional, national and international view options • Cost-per-click (CPC) and cost-per-thousand views (CPM) options • Time-of-day options • $5.00 to start advertising; no minimum monthly bill

5. AdWords pricing and placement • Advertiser sets a cost-per-click max anywhere from $0.01 to $100.00 • Advertiser sets a daily max to control costs • Electronic auction: “smart pricing” model automatically sets bid 1¢ higher than nearest rival • Max cost-per-click and “quality score” determines position on list

6. “Quality score” and placement • Quality score is a function of: • Max cost-per-click bid • Click-through rate • Relevancy of ad text to user’s keyword search • Advertisers want high quality scores because: • Quality scores determine list order • Users are more likely to click on ads at the top • Ads below the top seven often won’t appear on the first page

7. How Google maximizes AdWords revenue • Total revenue-per-page: • TR = Σ(pi*qi) • q1 = # of clicks on a given ad • p1 = $ per click on that ad • Google maximizes revenue by charging high p to the ads with high q through “quality”-based placement (People are more likely to click on links at the top, and are more likely to click on links relevant to their search) • Firms compete for top spots, raising p

8. Perfect price discrimination? • No, because advertiser is only charged its exact willingness to pay when another firm is actively competing for the same spot • Knowledgeable advertisers can get good results with relatively low cost keywords • Also, presence and intensity of competition varies by geographic location of the user’s IP address

9. Advertisers’ shady behavior • Using rival’s trademarks • Generally legal in the U.S. to use rival’s trademarks in metatext (code invisible to user), but illegal to use rival’s trademarks in ad text visible to user. • Example: another insurance company using “Geico” as a keyword, benefiting from Geico’s broadcast media ads • As yet, no definitive court cases on trademark use in unseen code

10. More shady behavior • Raising rivals’ costs: • Using software that clicks on rivals’ ads and makes it look like each click is coming from a different computer • Hiring low-wage workers in other countries to click on rivals’ ads • Google writes code that identifies simple click-fraud operations, and sometimes issues refunds to advertisers

11. Conclusion • Google tries to maximize AdWords revenue by offering many options and letting competition for placement drive up prices • Google’s auction system absorbs consumer surplus for competitive keywords, varying by user’s location • Some advertisers try to use rivals’ trademarks or raise rivals’ costs