We would never claim to be as smart as Google's pet economics professor, Hal Varian. But rereading the blog post Varian wrote to refute claims that Google's deal to sell ads on Yahoo would raise prices, some of his points puzzled us. Were I a student in one of his Berkeley classes, I'd raise my hand to ask three questions:
- Professor Varian, you wrote:
The SearchIgnite report claims that for any given keyword, Yahoo will have the ability to see whose ads are priced higher — Yahoo's or Google's — and then decide which ads to serve. Yahoo won't.
- It makes us wonder: If the arrangement doesn't include some way for Yahoo to choose Google ads when they're more lucrative than its own, how does it benefit Yahoo?
- Another point also confused me. You wrote:
The report assumes that Yahoo will serve Google ads for as many of its search queries as possible. Yahoo also has economic incentive to keep serving as many of their own ads as possible. They get to keep all of the revenue from those ads.
- Your argument seems to be that Yahoo won't use Google ads much because they won't help Yahoo's revenues as much as Yahoo ads. But I thought the whole point of the deal was to increase Yahoo's revenues with Google's ads. We're not that good at math here, but it seems possible that some of a large number can sometimes be worth more than all of a small number.
- One last question: Your two points may help Google — your employer — in an antitrust case. But they also undercut the entire basis for doing the deal. Is there some other rationale behind it? Like, say, getting back at Microsoft?