Although not everyone might recognize the name, you will probably encounter Google AdWords every time you use the internet. The advertisements of Google AdWords are visible when you search with the search engine, but also on many other websites. While Google AdWords is one of the many services Google offers, it is Google’s main source of revenue. The revenue of Google AdWords was about $67.4 billion USD in 2015 (1), while Google’s total revenue amounted to $75 billion. In other words, Google AdWords is responsible for about 90% of Google’s revenue.
You might think Google selling advertisements to advertisers has nothing to do with an electronic market, such as Uber or AirBnB, since there is only one ‘seller’, while electronic markets are often platforms that mediate between both many sellers and buyers. However, the price you pay as advertiser on Google AdWords is highly dependent other potential buyers and the process of price determination can in some way be considered an auction between all potential buyers.
Advertisers on Google AdWords pay per click on their advertisement. The price they pay is not set beforehand, but is based on a complex algorithm (2). This algorithm assigns a quality score to each advertisement, which is based on the estimated chance a visitor will click on the advertisement. The maximum price you are willing to pay per click determines, together with the quality score, the price you pay per click and the position your advertisement will get. In other words, Google’s algorithm optimizes profits for Google as the advertisements that will be clicked on the most and have the highest earnings per click, will be placed on top.
In Google’s advertising market, Google has a monopoly on selling advertisements, which makes economic principles for free market trading irrelevant. More demand will still drive up the price, but will not and cannot attract more sellers in Google’s world. Google has created an electronic market, with only one money maker.
1) https://www.sec.gov/Archives/edgar/data/1288776/000165204416000012/goog10-k2015.htm
2) https://support.google.com/adwords/answer/6297?hl=en
Dear Sander,
Thank you for your interesting blog post. You got clearly inspired by the lecture from Ting Li on Monday. Personally, I think that Google indeed made a very strategic move by creating an electronic market that is completely being served by only one supplier. One question that immediately come to mind, however, is whether Google acts against the competition law. Although having a monopoly is not illegal, one could argue Google abuses its position. What do you think?
Dear Sander,
Thank you for your interesting posts. You clearly got inspired by the lecture of Ting Li on Monday.
I do think that Google indeed made a strategic move to create an electronic market that is completely being served by only one supplier. However, one question that immediately comes to my mind is whether Google acts against the competition law. Although this law does not prohibit a monopoly, one could argue that Google abuses its position. What do you think?
Dear Danique,
Thanks for your comment. Although I am not familiar with competition law, I do see similarities with earlier competition disputes, such as for instance Microsoft that made Internet Explorer the standard browser of its operating system, which was punished by the European Commission. However, I think a permanent solution would be hard to reach. Google would have to open up AdWords to other websites that offer advertising spots (such as other search engines), which might have a very large impact on Google’s revenue….
Danique, you’re quite right. The European Commission has been investigating Google for years and now has three separate charges of market power abuse against Google. In July the latest charge was issued by the extremely active Margrethe Vestager, the competion commissioner. This charge was aimed specifically against Google adsense.
further reading:
https://fd.nl/economie-politiek/1160160/vestager-breit-ijverig-verder-aan-zaak-tegen-google
https://www.ft.com/content/744e2996-eead-3fea-a239-1c63eb333f9d
Dear Danique,
Thanks for your comment. Although I am not familiar with competition law, I do see similarities with earlier competition disputes, such as for instance Microsoft that made Internet Explorer the standard browser of its operating system, which was punished by the European Commission. However, I think a permanent solution would be hard to reach. Google would have to open up AdWords to other websites that offer advertising spots (such as other search engines), which might have a very large impact on Google’s revenue….