Notable Features of the Market for Internet Advertising

A combination of features makes the market for
Internet advertising unique. First, bids can be
changed at any time. An advertiser’s bid for a
particular keyword will apply every time that key-word is entered by a search engine user, until the
advertiser changes or withdraws the bid. For ex-ample, the advertiser with the second highest bid
on a given keyword at some instant will be shown
as the second sponsored link to a user searching
for that keyword at that instant. The order of the
ads may be different next time a user searches for
that keyword, because the bids could have
changed in the meantime.
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Second, search engines effectively sell flows
of perishable advertising services rather than
storable objects: if there are no ads for a partic-ular search term during some period of time, the
“capacity” is wasted.
Finally, unlike other centralized markets,
where it is usually clear how to measure what is
being sold, there is no “unit” of Internet adver-tisement that is natural from the points of view
of all involved parties. From the advertiser’s
perspective, the relevant unit is the cost of at-tracting a customer who makes a purchase. This
corresponds most directly to a pricing model in
which an advertiser pays only when a customer
actually completes a transaction. From the
search engine’s perspective, the relevant unit is
what it collects in revenues every time a user
performs a search for a particular keyword
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