Kevin Newcomb reports in the Clickz story: Search Ad Auction Models Flawed, Economists Say, that a new research paper reports that, "advertisers who bid what they're actually willing to pay end up paying more than they need to."
"We want to educate advertisers about the fact that in some sense they are being taken advantage of," Ostrovsky said in a statement. "Under the current mechanism, if they don't think carefully about their bidding strategies, they can end up paying a lot more to the search engines than they need to."
Good read with lots of facts and interesting quotes. Especially useful to those new to search marketing.
The research was authored by Michael Ostrovsky a economics professor at Stanford, Benjamin Edelman, doctoral candidate in economics at Harvard, and Michael Schwarz at UC Berkeley.
The paper is titled: Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords, and can be downloaded here.
From the abstract:
We investigate the "generalized second price" auction (GSP), a new mechanism which is used by search engines to sell online advertising that most Internet users encounter daily. GSP is tailored to its unique environment, and neither the mechanism nor the environment have previously been studied in the mechanism design literature.