Google rebuts study predicting higher ad costs

Search giant's chief economist attacks a "flawed" but widely cited study that predicted the Google-Yahoo search-ad deal will raise advertisers' prices.

Google's chief economist, Hal Varian, said Tuesday that "flawed assumptions" and "questionable methodology" undermine a SearchIgnite study that predicted a 22 percent ad price increase from Yahoo's search-ad deal with Google.

Varian took issue with several elements of the study, but led off with this one: "ad prices are not set by Yahoo or Google, but by advertisers themselves," through the search-ad keyword bidding process. Varian also said the study assumed Yahoo will show Google ads for as many searches as possible, which indeed Yahoo has said isn't its intent. Other gripes are in Varian's blog post

Of course, there are longer-term issues with the deal Varian didn't dig into. What happens if Yahoo grows accustomed to the revenue from Google and expands the use of Google's ads over time? Some believe there will be a feedback loop that will push advertisers toward Google's system, further undermining Yahoo's service, further advancing Google's position. If there's only one market for search ads, will advertisers bid the prices higher?

Facing antitrust scrutiny in the United States, Europe, and Canada, Google and Yahoo are working hard to prove the merits of the deal.

Yahoo is expected to get the bulk of the financial benefit--$800 million in new revenue in the first year of the deal. Google justified the deal in part as a way to help a fellow Internet company fend off Microsoft's mostly unwelcome attempt to acquire Yahoo.

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