This presentation by Hal Varian (Chief Economist, Google) was prepared for the discussion “Competition in digital advertising markets” at the 70th meeting of the OECD Working Party No. 2 on Competition and Regulation on 30 November 2020. More papers and presentations on the topic can be found at http://oe.cd/cdam. This presentation was uploaded with the author’s consent.

1. Online ads
Hal Varian
OECD, Nov 30, 2020
This document reflects the author’s views and does not necessarily represent those of his employer.

2. Online ads:
search and display

3. Search ads

4. Search engines and search ads
● Search engines
○ General purpose: Google, Bing, DuckDuckGo, Baidu
■ Ad supported
○ Special purpose: Amazon, eBay, Yelp, Travelocity,
Tripadvisor, Etsy, Scholar, Wikipedia
■ Ad supported, commissions, donations, etc.
● Search ads
○ Advertiser chooses keywords, user chooses queries
○ If keyword matches query, then ad is eligible to be shown
○ Advertisers want to choose relevant keywords
○ Personalization is minimal but ads can be filtered by ZAG
= (location, age, gender, etc) Source

5. Ad prices are determined via an auction
● Original model
○ Ad rank = bid x predicted clickthrough rate (pCTR)
○ Price = minimum bid necessary to retain position
● Current model
○ Ad rank is function of bid and quality score
○ Quality score depends on pCTR and post-click metrics
such as bounce rate, dwell time, pogosticking, etc.
● Publisher wants to sell impressions, advertiser wants to buy
clicks
○ The pCTR is effectively an “exchange rate”
○ bid/click x clicks/impression = bid/impression
Source

6. General purpose v commercial search
General purpose search
“General purpose search is a tough business...you can only sell
6% of what you produce.”
Commercial search
● Product search (special purpose)
○ Merchants: Wal-Mart, Macy’s, Amazon
○ Merchant platforms: eBay, Amazon, Shopify
○ Comparative Shopping Sites: Shopzilla, Idealo, etc
○ Recommendation/review sites
● Other special purpose search: travel, local, entertainment,
auto, jobs, etc.
All the money is all in commercial search---which is highly
competitive. [Source]

7. Display ads

8. Display ads
● Ads that appear in 3rd party content
● 80% of display revenue is negotiated, 20% uses an open
auction [Emarketer-Jan 21, 2020] and this is declining.
● A publisher makes space on page available for ads
● Ads are provided by some ad network (e.g. Google)
● Possible targeting method chosen by advertisers
○ No targeting -- run of market
○ Contextual ads -- relevant to text on page
○ Reminder ads -- sites or products you looked at recently
○ Interest based ads -- relevant to types of sites you visit
■ Users can go to [Ads Settings] to see, edit, start, stop
■ Advertiser can go to [audience targeting] to see what
audiences advertisers can target

9. Comparing search and display ads
● Search ads
○ Show ad based on current or recent search behavior
● Display ads
○ Retargeted display ads: show ad based on recent
website visits
○ In market ads: show ad based on recent purchase
intent
○ Interest based ads: frequently visited sites
● Many restrictions on advertising. See Google Ads Policies

10. Comparing search and display ads
● Search ads
○ Show ad based on recent search behavior
● Display ads
○ Retargeted display ads: show ad based on recent
website visit
○ In market ads: show ad based on recent purchase
intent
○ Interest based ads: frequently visited sites
● Timing is everything!
○ Note that retargeting is uses merchant data, not
search data
○ That’s why there are so many players in display ads

11. Behaviorally targeted ads and news
● Newspapers never made money from news.
○ They made money from Shopping, Travel, Home and Garden,
Automotive, Finance, Entertainment, with contextually relevant
ads. This revenue was used to to cross-subsidize news
production.
○ Then, internet comes along and there are thousands of sites
specializing in these topics, so cross subsidization model for news
breaks down.
● Solution: behavioral targeting. Target the ads based on past behavior
not just what you are doing now (e.g., sites recently visited,)
○ Behavioral targeted ads are worth roughly 2 times as much as
non targeted ads. Advertisers and publishers choose the type of
targeting.
○ Google pays out 70% of revenue from behaviorally targeted ads
to publishers (= $14B/year) and bears all of the cost of providing
them.