On Google and honest auctions

Filing this under "spam" because it's about advertising, though it's not really about spam.  Slashdot is reporting on an apparent ruckus having to do with Google running its own ads on AdWords and whether that is or isn't in some way unethical or dishonest.  Google issued a Web log posting defending itself, but as usual, most people and especially Slashdot are missing the interesting part of the story.  My opinion is that it's okay for Google to bid in its own auction, but that it's not an honest auction in the first place and that's a bigger story.

An honest auction is designed to determine a fair price for a good by balancing everyone's interests.  The seller wants to make as much money as possible, and the buyers all want to buy the good but while paying as little money as possible.  There are variations possible on the exact procedure, but the general idea is that buyers offer prices of their own choosing, and the seller closes the deal with the buyer who offered the most.  Every buyer is satisfied because they have the opportunity to offer the highest price they're willing to pay; then they either get the good at that price, or see that someone else was willing to offer more.  The seller is satisfied because they see that (at least among the set of buyers who participated) they got the best price available.  It's important that the same rules apply to all buyers; otherwise a buyer or the seller could claim "I could have gotten a better deal if not for the spurious distinction between buyers."

What happens if the seller (or someone acting in concert with them) submits a bid of their own?  Well, some auctions forbid that, but those are mostly the real-time auctions like eBay, where buyers get to submit bids and see others' bids and try to bait each other into bidding more or dropping out.  In that kind of psychological framework a seller could try to egg possible buyers into buying at higher prices.  However, in a pure auction where all buyers submit their bids at once without seeing the others, seller bidding is basically harmless.  It ends up being just the same thing as a reserve price or minimum bid:  the seller can declare ahead of time "I won't sell for less than X amount" and as long as that is applied to all buyers equally, it doesn't matter that in effect there's a phantom buyer who happens to really be the "not selling to anyone" option of the seller.  In an honest auction with the same rules applied to everyone, seller bidding and reserve prices (which are the same thing) shouldn't be a problem.

On Slashdot, a lot of stupid people are saying that Google is in some way guilty of some kind of misconduct for bidding in their own auctions.  They're saying that Google is free to bid as much as it likes, blocking out all other bidders, because it doesn't really have to pay when it "wins" - it's just paying itself.  Suppose Google bids a million dollars per click.  Okay, they win the auction, and they're on the hook to pay themselves a million dollars per click.  So you click on the ad, and Google says "There, we've paid ourselves a million dollars." and they can do that as many times as they want without hurting their budget, because the net effect of them paying themselves a million dollars (excluding tax considerations) is zero.

But as the somewhat less stupid people are pointing out in the Slashdot discussion, that's not actually true, because there is an opportunity cost associated with Google bidding in their own auction.  If they bid a million dollars per click and so "win" an auction, that means that some other buyer, who would pay them a smaller amount but in real money, doesn't win.  So it really is just like setting a reserve price or minimum bid; they don't want to set it too high or it costs them the opportunity to make the sale.  That'll keep them from setting an unreasonable price; and although it reduces the purity of the auction in the sense that Google gets to set a minimum price, the price is still determined by "the most someone is willing to pay for it" when you consider that Google itself is willing to risk paying the price of "no sale".  A losing buyer can say "Okay, either some other buyer was willing to pay more than me, or Google was willing to lose at least the amount I was willing to pay; I've received my Satisfaction." That part is honest.

What is dishonest is that Google doesn't really determine the price by an auction as described above in the first place.  What actually happens is that they set a different minimum bid per bidder, depending on a secret "quality" score.  In many cases, some minimum bids are far higher than the price that would be determined by an honest (that is, same rules for all bidders) auction.  Maybe someone else was willing to pay $0.10, I'm willing to pay $0.20, but their minimum bid is $0.05 and mine is $5.50 (no joke); then the other bidder wins even though I was willing to pay more.  As a result, buyers do not determine the price; the price is actually determined by the "quality" score and the buyers' choices to take it or leave it.  That means it's not an auction but a simple sale - with discriminatory pricing.  Google decides whom they will deal with and how much those people will pay, and doesn't tell anybody why, and there is only the appearance of an auction.  This isn't a random accusation on my part, or something concealed by Google; it is openly documented (albeit not with words like "dishonest" or "not an auction") in the AdWords help files.

Disclosure:  I've attempted to advertise through Google AdWords myself, and am no longer doing so.  I ended up on the wrong side of the "quality" algorithm, with insanely high minimum bids even for low-traffic keywords on which there were no ads being displayed at the time.  On those same keywords, my site was already near the top of the unpaid search results (without any "optimization" shenanigans), so the PageRank robot liked it, thus making it hard to argue that my site was so inappropriate as to be worthy of being expelled from the auction.  I was also charged a US$15 up-front fee to get an account in the first place, before I had the chance to learn that they don't run an honest auction; that seems to me to put AdWords squarely under the definition of a bait-and-switch scam.  My concerns were not addressed in multiple communications with customer support.  So, I'm not disposed to write a favourable article about AdWords and you should probably keep that in mind when reading my opinion above.

I'm not even going to get into why AdWords also isn't pay-per-click but rather pay-per-impression; that's another reason I think it's bait-and-switch, but it'll wait for another day.

There is another system currently selling Web site advertising under a different auction system with different serious flaws of its own, but at least honest; and they have better customer service, too.  That's the system responsible for the ad bar below.  Some of the advertisers on there at the moment are pretty cool and you might like to click on them, but I don't get paid for clicks; I only get paid for it if you buy advertising, which you can also do by clicking the appropriate link.  As of this writing, there are even a couple of slots on there still available for free.