The textbook is my microeconomics Bible.

Although Varian has a lot to do with it-his textbook is My Microeconomics Bible, the cornerstone of Google's advertising success was laid before he arrived. The traditional advertising industry is sold through sales staff for advertising quotes. And Google decided to bring advertising space for auction. When Varian, now Google's chief economist, "examines" the auction mechanism designed by Google's computer scientists, he finds it perfectly designed.

If you use Google search, Google's a group of computers try to output the best possible search results, and another group of computers for auction operations, in order to put the most effective ads next to the search results, according to the importance of a total of 11 advertising positions. Each time the user searches, the auction runs once-up to billions of times a day.

In addition to the huge amount of computing requests, these auctions are tricky to run for two reasons. First, these advertising positions can be substituted for each other. If I sell my flight ticket to the Icelandic capital Reykjavik and you search for "Fly Iceland" on Google, then I would like an ad position. I may not need all the places, and it will irritate the user, which is not good for anyone in the long run (except perhaps Google's rivals Yahoo and Microsoft).

Google does not want to sell ads indiscriminately because advertisers are worried about winning multiple redundant locations. The solution is an algorithm called "Generalized second-order auction (generalised second price auction)": The winning bidder obtains the first advertising position, pays the second bidder's offer, and the second bidder obtains a second advertising position to pay the third bidder's offer. (This is a bit too simplistic to see later.) Google's willingness to accept prices that are lower than the actual price of each bidder may seem odd, but it will encourage bidders to quote higher prices, potentially boosting Google's overall revenue.

The second question is what is the actual measure of the bid. Google can use the "show" as a unit charge, that is, an advertisement for each show to collect a fee, or "click" for the unit fee, that is, users click once a ad jump to The advertiser's website to collect a fee. The difficulty here is that Google's costs (such as giving up the opportunity to sell ads to others) are calculated according to the "Show" count, and advertisers are most concerned with click-through. I entered "Picasso works" at Google, which provided me with a search result on the purchase of posters, as well as the results of the Christie's (Christie's) auction. I'm sure Christie's will get a much smaller hits, but it's willing to pay a higher price for each click.

Google's solution is to create a "quality" standard based on the expected click-through rate, which acts as a "currency conversion" between the display and the click. If Christie's is willing to pay 1000 dollars for each click, and Google expects it to get 1 clicks, so long as Google expects Art.co.uk clicks to be more than 10,000 times, Art.co.uk can win with a 10-cent quote per click-and rightly so, Because Google expects to get a higher income from Art.co.uk. The advertising fee paid by Art.co.uk will depend on the price of Christie's and the "quality" of both ads.

This is a wonderful set of methods, but it's very simple and very well executed. What surprises me most is that many of Google's search results are "sold at a low price," with a handful of advertisers paying the floor fee, and some searching without even advertising at all. In Google input "Hal Varian Google ad Auctions", you do not see any ads. If you enter "Flowers", I can assure you that all 11 ad spots will be filled. That's the kind of search that Google earns 36 billion dollars.