Steve Tadelis, Distinguished Economist at eBay and his colleagues have done an experiment and seem to have concluded that its a waste of money to pay for sponsored links on Google when Google’s regular search algorithm shows links to eBay for free.
Before you read the rest of this post, go to Google and try searching for “Amazon.” You’ll probably notice that the top two listings are both for Amazon’s website, with the first appearing on a light beige background. If you click on the first — a paid search ad — Amazon will pay Google for attracting your business. If you click on the second, Amazon gets your business but Google gets nothing. Try “Macys,” “Walgreens,” and “Sports Authority” — you’ll see the same thing.
If you search for eBay, though, you’ll find only a single listing — an unpaid one. Odds are, after marketers at Amazon, Walgreens and elsewhere catch wind of a preliminary study released on Friday, their search listings will start to look a lot more like eBay’s. The study — by eBay Research Labs economists Thomas Blake, Chris Nosko, and Steve Tadelis — analyzed eBay sales after shutting down purchases of search ads on Google and elsewhere, while maintaining a control set of regions where search ads continued unchanged. Their findings suggest that many paid ads generate virtually no increase in sales, and even for ones that do, the sales benefits are far eclipsed by the cost of the ads themselves.
This is a dilemma for Google. Because it suggests that the way to capitalize on the popularity of their search algorithm is to discriminate against those who don’t pay for ads. But unless Google reinvents itself as a full-blown paid advertising site, such discrimination is likely to raise legal issues.
Cheap Talk 
6 comments
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April 4, 2013 at 2:19 am
Yarbel
Consider another possibility. I am Amazon’s biggest competitor, Bamazon. The day Amazon stops buying ads on Google, I start my campaign, to get Bamazon links on the top of the list. Many consumers would be confused or wouldn’t mind and I will get a large share of their business.
April 4, 2013 at 6:58 am
Matt
Building on Yarbel, I seriously doubt that this eBay result will hold in other markets where there is at least one legitimate competitor.
April 4, 2013 at 10:46 am
Trinity Rivers
It’s makes sense to me. I deliberately skip paid ads anyway. I’m wondering when advertisers are going to figure out that they are approaching the point of diminishing returns. Shove ads in the consumer’s face long enough and they head elsewhere.
April 4, 2013 at 1:30 pm
kibilds
This makes sense when users are searching for the brand name, because that’s exactly what they want. But when they search for “running shoes”, I’m pretty sure Nike and Adidas would want to pay to be first.
April 5, 2013 at 7:05 am
Greg Taylor
I think Google has some room for manoeuvre: the FTC recently concluded an investigation of Google without imposing any penalties for own-content bias—even though Google executives have been recorded saying that the search engine favours its own sites in results (the EU DG competition is looking a bit more Hawkish). In practice, discriminating in a way that does not systematically favour your own downstream sites is likely to be even harder to detect than is own-content bias. For most search phrases, for example, there would be nothing objectively wrong with putting Wikipedia in the top spot.
Incidentally, it is not clear that the search engine should wish to condition its discriminatory behaviour purely on whether a firm advertises or not: even when a firm does advertise, pushing its organic link down the page may be optimal because it will cause more users to click on its sponsored link.
My sense is that the biggest discipline on Google’s behaviour is likely to be consumer demand for high-quality search results. I have couple of papers on the topics of search result algorithm provision and search bias that look at these issues in more detail.
April 7, 2013 at 7:20 am
Mort Dubois
Ummmm, not the demise of sponsored search. You are taking one atypical situation and drawing an unwarranted conclusion. For markets and searches with multiple competitors, Adwords is by far the most efficient way to match buyer and seller, and paying for ads is well worth the cost. It works best when someone is searching for a thing without knowing who sells it. Which far outnumbers the number of people who are capable of typing “Ebay” into a Google box but not the URL bar in their browser.