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Auction Stuffing?

Is Google stuffing the auction? Sid Shah of EF wrote a great piece for SEL talking about the mechanics of the auction, and some interesting phenomena observed near the top of the listings. He pointed out that oftentimes pushing bids to get from, in his example position 1.09 on average to position 1.01, involves paying much higher cpcs. How could that be? AdRank is determined by the following formula for each ad in a given auction: Google AdRank Formula These rankings then determine which ad earns which position on the page. Once that's done, the actual CPC paid is calculated based on the AdRank of the ad below, plus a penny. Since the cases we're studying involve ads almost always in position 1, I've framed the formula in terms of the number 1 ranked ad vs the number 2 ranked ad: Actual CPC calculation based on AdRank What is clear from this is that any increase in my position 1 bid here should have no impact on my actual CPC against this particular second place finisher. That makes sense. It doesn't matter how badly I beat the number 2 ad in AdRank, I still just pay a penny more than what is required to match number 2's AdRank. There are then only a few ways to explain why the average CPC would go through the roof for a brand keyword moving from position 1.09 to position 1.01 in Sid's example:
  1. The CPCs required to win the auctions you weren't previously winning are huge. If we assume for the moment that the bidding landscape hasn't changed, then we can say that the first 1701 clicks still cost ~$0.50 each, meaning the incremental 167 clicks gained from moving from 1.09 to 1.01 came at a cost of ~$10.01 each.Is that plausible? Well, maybe. It would imply that you're being outgunned in certain auctions, likely certain geographies, by someone with a pretty compelling QS. Their QS would likely have to be quite a bit stronger than the folks you normally compete with to explain the huge CPC jump needed to beat them. That could happen if local franchises are competing against a national website for that regional traffic. It could also happen if an affiliate is geo-targeting around certain regions, like your headquarters.
  2. The bid landscape has changed dramatically. It's possible that the existing participants in the auction have raised their bids and therefore their AdRank, forcing you to pay more for the same traffic. This kind of pre-Panama era bid jamming could be happening, I suppose, but given the opacity of the bid landscape it seems unlikely, and particularly unlikely to happen every time and almost instantaneously.
  3. You are competing in different auctions. My first reaction was that this phenomena simply shows broad match getting broader as the bids get more aggressive, meaning your brand terms start qualifying for auctions on "rhubarb pie recipes", or whatever. However, we're talking about keywords on exact match, so it can't be this. It could be that we're competing in a wider array of syndication partner's auctions, but that seems unlikely unless they're ignoring the matchtype. We think we've seen this on Google.com only campaigns as well.
  4. You are competing against different ads. This one is odd and a bit creepy, frankly. The notion would be that Google brings other ads into the auction that have higher AdRanks than the old second place ad in order to increase your CPC!But why wouldn't those higher AdRank ads have been included in the auction in the first place? They would have, if they actually had a higher AdRank, but they don't. They DO have a higher product of MaxBid x CTR, but the QS isn't high enough to get them into the auction ordinarily because the relevancy scores are poor. The hypothesis is that as gaps appear in the AdRank landscape, created by one advertiser bidding more or another reducing bids, Google sacrifices relevancy for the sake of higher CPCs and inserts less relevant ads into those gaps. They don't do this all the time, because less relevant ads sour users on the sponsored listings. It's a classic short term vs long term payoff when done opportunistically.
Now, at this point, RKG hasn't researched the phenomena enough to reach a definitive conclusion about which of the 4 explanations above dominates. We doubt that 2 or 3 play a significant role. It could be that we're entirely wrong about #4, and that #1 is the whole explanation. But we don't think so, and apparently neither does Sid. So what? What if Google is stuffing the auction? There is certainly nothing illegal about it -- it's their game they get to make the rules. While it strikes me as unseemly, I suppose there isn't really anything unethical about it either. Heck, in the old days of negotiated advertising prices there was no rational basis for the price advertiser's paid and no assumption that you paid about what others were paying for similar placement. Indeed, you're still assured that you won't pay more than your bid for the clicks, so the fact that through a bit of gamesmanship you end up paying a something closer to your bid than you might have otherwise, it's hard to fault Google for that. It does speak to the importance of bidding what you can afford to spend for the quality of traffic you receive. If you're willing to pay any price to be on top there may simply be an extra tax applied for that decision.
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