CONCLUSION
Search engines are an example of a two-sided matching model supported by advertising. Not only are they interesting in their own right, but they also offer a fertile ground for economic analysis.
During the 1960s and 1970s the scientific study of financial markets flourished due to the availability of massive amounts of data and the application of quantitative methods. I think that marketing is at the same position finance was in the early 1960s. Large amounts of computer readable data on marketing performance are just now becoming available via search engines, supermarket scanners, and other sorts of information technology. Such data provide the raw material for scientific studies of consumer behavior and I expect that there will much progress in this area in the coming decade.NOTES
* This chapter is an updated and extended revision to the author’s 2007 Angelo Costa Lecture presented Rome, which was published in the Rivista di Politica Economica, November-December 2006.
1. See Langville and Meyer (2006) for a detailed description of the mathematics behind PageRank.
2. I am told that this idea may have been stimulated by a student who took Charlie Plott’s course in experimental economics at Cal Tech. So economists seemed to have played a role in this auction design from an early stage!
3. A detailed and reasonably accurate history of the development of the Google ad auction model is available in Levy (2009).
4. A type of sealed-bid auction.
5. GoTo.com experimented with a first-price auction for some time and found it to lead to unstable behavior. Zhang and Feng (2005) and Zhang (2005) document and model this phenomenon. I am told that GoTo’s decision to move to a second-price auction was motivated by some experiments run by a group of Cal Tech auction specialists.
6. Marginal cost/average cost.
7. I am simplifying the actual result for ease of exposition; see Varian (2006) for the details.
8. The reservation price actually depends on ad quality as well.
9. In theory the revenue impact of ranking by bids per click or bids per impression is ambiguous. In practice, ranking by bids per impression is better.
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