Journal of Decision Support Systems, 43(1): 192-198, 2007
This paper looks at the behavior of online advertisers in dealing with search engines like Google and Yahoo!.
Revenues and outcomes for search engines and advertisers vary with the method used to auction online advertising space. Containing bidder manipulation is a key issue.
- Internet advertisers buy the keywords used by users of search engines. When the keyword is used, the search engine shows an ad.
- In selling keywords, it makes sense for search engines like Google and Yahoo to use auctions; they do not have to worry about setting prices for millions of differently valued search terms.
- Revenues and outcomes vary depending on the rules of the auction.
- The firm Overture (now part of Yahoo!) used a first-price auction. Each successful bidder paid what he bid per click. Bidders manipulated their bids, raising and lowering them in response to other bids. Prices and positions were unstable, changing rapidly because of the use of software “bots” to automatically revise bids. Bidders who wanted the top spots might not spend much time there.
- In a second-price auction, bidders pay the amount that the next highest bidder bids. One type is the “Vickery” auction, in which advertisers' payments partly depend on bids and partly on how many clicks their ads get. Using this method, Overture could have earned 10% more revenues.
- Yahoo and Google use second-price auctions, but do not use the “Vickery” method of varying payments with click-through rates. Yahoo ignores click-through rates; Google uses another method.
- Evidence shows that bidders are still manipulating bids on Google and Yahoo; they might benefit from adopting another type of auction.