How do search ads decide who appears first?
Every time you search, advertisers bid against each other in a tiny auction that is over before the page loads.
โถ Start the storySearch ads are sold in a very fast . Advertisers pick keywords and say how much they would pay for a click; when someone searches, the engine runs an auction among the advertisers whose keywords match, and the highest bidder gets the first slot, the next bidder the second slot, and so on. This design is called a generalized second-price auction, and it is used mainly for auctions where sponsored search slots are sold.
The twist is the price. Each winner does not pay their own bid. The highest bidder pays the price bid by the second-highest bidder, the second-highest pays what the third bid, and so on. And advertisers pay per click: a bidder only pays if the user actually clicks the ad.
Step 1: Someone searches
Advertisers with matching keywords enter
Step 2: Slot 1: bids $5
Pays the next bid down: $3 per click
Step 3: Slot 2: bids $3
Pays the next bid down: $2 per click
Step 4: Slot 3: bids $2
Pays the bid below it, if any
Step 5: Only clicks cost money
No click, no charge
Why charge the next bid down? The idea came as a natural extension of the , a famous design in which the winner pays the second-highest bid. For a single item, bidding your true value is the best strategy. With several slots it does not quite work: in a worked example, the top bidder can gain by lowering its bid to 5 and taking the second slot for a price of 1. So the generalized version is called .
The money story is surprising. Google took the idea of selling search terms in 1998 from a small company called goto.com, and it turned the search business from struggling into one of the most profitable on the Internet. Google launched AdWords in 2000, and its text ads mimic what an average search result looks like. So the next time you see the first few results, look for the small label that says they are ads.
1998
Google adopts selling search terms, an idea from goto.com
2000
Google launches AdWords
April 2002
Overture sues Google over AdWords
2004
Lawsuit settled after Yahoo! acquires Overture
Quiz me
0/3
Recap
Search ads rank by bid, each winner pays the next bid down, and only when someone clicks.
๐ก A trick to remember it ยท Everyone steps one rung up the ladder but pays what the person below offered, and only when a visitor clicks.
Surprising fact ยท With several slots, bidding your true value is not always the best strategy, unlike in the single-item Vickrey auction.
Sources (4)
No source, no claim. Every fact in this lesson (13 claims) cites at least one of these.