Google's Economist: Yahoo Partnership Won't Raise Prices

Google has been pretty quiet in discussing the details of its search deal with Yahoo, but as antitrust scrutiny of the partnership builds, the search giant's chief economist has taken issue with a study that claims the deal will raise prices for advertisers.

Writing on Google's Public Policy blog, Hal Varian takes issue with a SearchIgnite study that charges the partnership will raise prices as much as 22 percent.

Varian has three large quibbles with SearchIgnite's methodology.

• The report argues that Yahoo and Google will set higher prices for ads, while Yahoo and Google's ad prices are set by advertisers through a bidding process.
• SearchIgnite claims that Yahoo will be able to choose which ads to serve according to the highest bid, but under the agreement, bidding will be blind.
• SearchIgnite assumes that Yahoo will serve Google ads for as many search queries as possible, while the companies plan to serve Google ads solely on Yahoo results pages that have a lack of relevant ads.

A growing concern is that Yahoo will eventually serve Google ads on more of its results pages as the company gets more income from those advertisements, lowering the importance of Yahoo's ad business and its effectiveness as a Google competitor. Varian disputes that charge, saying that Yahoo "has a strong economic incentive to keep serving as many of their own ads as possible, since they get to keep all of the revenue from those ads, while Yahoo! only receives a part of the revenue from ads served by Google."

Interestingly, Varian acknowledges that prices will increase, but Google is betting that advertisers will want to pay a premium for improved performance:

"After taking a close look at the study, I believe it makes several flawed assumptions and uses questionable methodology. The paper suggests that advertisers will be getting the same performance from the same ads, just at higher prices. We believe that advertisers will be getting significantly better performance at prices that reflect that improved performance." 

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