For those of you that don’t know this – I was a beta tester of the original AdWords system at Google. Prior to AdWords and its auction process, advertisers would simply petition a Google sales representative each quarter for advertising inventory on a bundle of keywords. The process was utterly messy and unfair. Even when I won the inventory, I felt that I had been put through the wringer to get it.

So then along comes a new system ‘AdWords’ which offers a bidding mechanism similar to the top competitor at that time – Overture (formerly GoTo.com and now Yahoo! Search Marketing). As I was a large advertiser in the previous system, I was asked by Google to beta test the new AdWords system. Fast forward to today and I have been using AdWords pretty much continuously since the beta test. So I would expect that I have used AdWords as much or more than any other advertiser out there.

I came across an odd situation recently with regard to the AdWords system. The reason that it strikes me as odd has to do with a post on the Official Google Blog from May of this year by the ‘Chief Economist’ at Google, Hal Varian. The post is entitled, ”How auctions set ad prices”. In the blog post there are two particular items that appear to be in error:

”The outcome of the ad auction is efficient in the sense that the available ad slots are awarded to those who value them mostly highly. The outcome is also equitable in that the price an advertiser has to pay is determined by the other advertisers — those with whom it has to compete for slots.”

and

”Advertisers bid for position and pay just enough to beat their runner-up. Prices for keywords are, ultimately, determined by the advertisers.”

Hence the odd situation I recently ran into. When signing up for a new keyword, I noticed a message that I had never seen before in the AdWords interface. It essentially told me that the minimum bid for the keyword that I was bidding on was $10. The keyword phrases was ‘.NET framework‘. Since I had never run the keyword before, and my quality was high enough for the hundreds of other keywords I was running, I was puzzled as to why I should pay $10 right out of the gate. ”Shouldn’t I be able to bid a lower amount?” I thought.

Being a large advertiser I contacted my rep at Google to ask why the minimum bid was so high. The answer was classic Google. Something like – ”well the quality of that keyword drives the market rate up to $10”. That kind of made sense. Until I looked at the keyword search for .NET framework.

There are no advertisers on this keyword phrase. None. Zero. Zilch. Nada. The conclusion that I have come to is that $10 is a complete rip-off for that keyword phrase, and no one with any sense would possibly pay that much per click for that term. But wait a minute, if the market price as determined by advertisers is actually lower than $10 – where did the $10 minimum bid come from?

So Mr. Varian, the correct statement with regard to AdWords as it applies to .NET framework (and I suspect other terms, maybe a LOT of other terms) is something more like: ”Advertisers bid for position and pay just enough to beat their runner-up a price that Google sets as a minimum. Prices for keywords are, ultimately, determined by the advertisers Google.”

I’m also left to ponder, ”Why doesn’t Google want ads on some keywords?”.

This content was written by Derek Vaughan and appears courtesy of the VPS experts at HostMySite.com.