Search Ad Auction Models Flawed, Economists Say

" Paid search advertisers who bid what they're actually willing to pay end up paying more than they need to, according to research by economics scholars at Stanford Business School.

The research paper by Michael Ostrovsky, assistant professor of economics at Stanford; Benjamin Edelman, doctoral candidate in economics at Harvard; and Michael Schwarz, RWFJ Scholar at UC Berkeley, blames both the naivete of bidders and the “generalized second price” (GSP) auction mechanisms used by Google and Yahoo!

"We want to educate advertisers about the fact that in some sense they are being taken advantage of," Ostrovsky said in a statement. "Under the current mechanism, if they don't think carefully about their bidding strategies, they can end up paying a lot more to the search engines than they need to."

Search marketers have long intuitively known getting the top position isn't always necessary. Often, it's not even the best strategy. To further quantify that belief, Atlas undertook a research project called the Atlas Rank Report, looked at how a paid search ad's rank affects traffic in July 2004, and how rank affects conversion in October 2004 ..."

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