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Competition for Google AdWords. A P EEP 142 4/13/06. Company Overview. incorporated in 1998 stock valuation over $100 billion $6.1 billion revenue in 2005 $1.5 billion accounting profits in 2005. Two main advertising programs. AdWords

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Competition for Google AdWords

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Competition for Google AdWords

A P

EEP 142

4/13/06


Company Overview

  • incorporated in 1998

  • stock valuation over $100 billion

  • $6.1 billion revenue in 2005

  • $1.5 billion accounting profits in 2005


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%


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


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


“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


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


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


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


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


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


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