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Google’s ad auctions under attack by the European Commission

Summary:
Hal Varian explains how Google's ad auctions work in this video:  Each advertiser is ranked with a quality score which is multiplied by their bid to get their bid rank.  Because it is a second-price auction, a winning advertiser has only to outbid the second highest ranked advertiser.  In other words, the higher quality score of the advertiser, the less they have to pay to win.When Google's algorithms downgraded the quality of some European comparison shopping sites (pejoratively called "click farms"), the European Commission sued Google, claiming that it changed the algorithms to favor its own comparison shopping sites, essentially "abusing its dominant position in search."  The downgrade made it more costly for the European sites to win ad auctions. Google argued that the quality

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Hal Varian explains how Google's ad auctions work in this video:  Each advertiser is ranked with a quality score which is multiplied by their bid to get their bid rank.  Because it is a second-price auction, a winning advertiser has only to outbid the second highest ranked advertiser.  In other words, the higher quality score of the advertiser, the less they have to pay to win.

When Google's algorithms downgraded the quality of some European comparison shopping sites (pejoratively called "click farms"), the European Commission sued Google, claiming that it changed the algorithms to favor its own comparison shopping sites, essentially "abusing its dominant position in search."  The downgrade made it more costly for the European sites to win ad auctions. 

Google argued that the quality downgrades simply reflected the lower quality of the European comparison shopping sites because it was not possible to purchase an item on them.  Rather, the European sites just sent users to another site on which they could buy an item:

“We believe the European Commission’s online shopping decision underestimates the value of those kinds of fast and easy connections. While some comparison shopping sites naturally want Google to show them more prominently, our data show that people usually prefer links that take them directly to the products they want, not to websites where they have to repeat their searches.”

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