AER Papers and Proceedings, Vol. 99, No. 2, pp. 430-434, 2009
This paper describes how Google and other search engines sell Internet ads.
Advertisers seem to enjoy from two to three times more benefit from online ads as their costs.
Internet advertisers bid on keywords used by users of search engines. When the keyword is used, the search engine shows an ad. If the user clicks on the ad, the advertiser pays the search engine.
Search engines make more revenue when an ad is posted that users are more likely to click on, so search engines should try to ranks ads by a measure of ad quality—how likely users will be to click—as well as by bids.
Search engines like Google use a “generalized second price auctions” to sell online ads. Bidders pay what the next lower bidder has bid.
An alternative type of auction is the Vickrey-Clarke-Groves (VCG) auction. Bidders pay a price derived from other bidders, so that the bidder is paying the cost to others of his slot.
In reality, bidders bid one amount that applies to many auctions. Advertisers experiment to find out what number of clicks gets them the most profit, their costs per click and how much they ought to bid.
To figure out how much surplus advertisers enjoy as a result of buying online ads, one must estimate how much a given ad would be clicked on if it were in a different position; for example, an ad might get 20 percent more clicks if it moved from position four to position three.
Advertisers seem to be getting from two to three times more in benefit from online ads as they are paying.