Wasted Ad Bidding

From Greg Linden:

To summarize, in their data, advertisers do not appear to be bidding rationally or consistently.

Bidders very often have inconsistencies in their bidding on keywords over time that violate the ROI-maximizing strategy. The problem was most severe for advertisers that attempted to bid on many keywords. Only 30% of second-price auction bidders who bid on more than 25 keywords managed to keep their bids consistent over time. Only 19% of those bidders managed to maximize their ROI.

It looks like advertisers quite easily become confused by all the options given to them when bidding. 52% of the second price bidders they examined simply gave up and submitted essentially the same bid across all their keywords even if those keywords might have different value to them.

As Auerback et al. say, it may be the case that advertisers have neither “the resources or sophistication to track each keyword separately” or may “not have an accurate assessment of their true values per click on different keywords”.

But this brings into question the entire ad auction model. In sponsored search auctions, we assume that advertisers are rational, able to manage bids across many keywords, and able to accurately predict their conversion rates from clicks to actions.

First the disclaimer in that I know zip (nada) about advertising on the internet, but two things strike me here:

  1. That advertisers probably need better tools to track and measure the effectiveness of their keyword bidding.
  2. That keyword sellers would be quite happy with the status-quo because they get to keep the cost of the above ineffectiveness.

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