Google Ads: A Sham Market?

For decades, companies have had to pay Google to advertise on their own brand keywords, or risk competitors snatching those valuable search terms. However, a new study by Northeastern University researcher Christo Wilson reveals this entire system is a "sham market" perpetuated by Google's dominant market position.

Wilson's study, published in the *Proceedings of the International AAAI Conference on Web and Social Media*, analyzed user search behavior and ad spending data. The results were stark: brand ads on Google, while generating significant revenue for the search giant, are largely ineffective for advertisers.

The study involved recruiting US residents to install a browser extension that tracked their online activity, including search queries, search results, and ad clicks. The researchers found that while some users did click on competitor ads, the click-through rate was low, and the abandonment rate – where users click on an ad, then quickly return to the search results – was high.

This suggests that brand ads are not effectively driving traffic or sales for advertisers. So why are companies still paying for them?

Wilson argues that Google's dominant market position forces advertisers into this seemingly futile practice. Companies feel compelled to pay for their own brand keywords, fearing that a competitor will capitalize on their search terms. This creates a self-perpetuating cycle where everyone is paying for ads that yield minimal return.

“Google and the other search engines have created this market where you can advertise on navigation and brand ads, but those ads are not very effective for competitors so they’re sort of wasting their money,” Wilson says. “As a consequence, the defending companies … also have to spend money on these ads and they’re not really getting anything for it.”

This “rent-seeking” by Google, as Wilson describes it, has significant ramifications beyond the advertising industry. The cost of these ineffective ads is ultimately passed on to consumers through higher prices for products and services.

“Why do those Nikes cost $200?” Wilson asks. “Some of that is to pay for their marketing. They’re spending a boatload of money on these search ads, but those ads are not effective. Google is making a bunch of money and you’re effectively subsidizing Google through your consumer purchases.”

While regulators and lawmakers in the US have raised concerns about Google's dominance for years, India has taken a more aggressive stance. In 2023, India effectively banned brand ads, citing trademark violations. This ruling could potentially disrupt Google's advertising revenue model.

Wilson believes that addressing the fundamental issue of Google's market dominance is key to reforming the brand ad system.

"Arguably the reason Google can continue to do this is because they have a lock on the market and there are no alternatives," Wilson says. "But if you address that fundamental issue and enable competition in online search, then perhaps this issue fixes itself."

In conclusion, the current brand ad system on Google is a flawed model that benefits Google at the expense of advertisers and consumers. Increased competition in the online search market is necessary to break this cycle and ensure a more equitable and effective digital advertising ecosystem.