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Google's chief economist argues for Yahoo ad pact

September 16, 2008 |  5:18 pm

Hal VarianWho better than Google's chief economist to defend the company's proposed search advertising partnership with Yahoo?

In a blog post on the company's website today, Hal Varian countered growing public criticism and antitrust scrutiny of the partnership by rejecting fears that it would increase the cost of search advertising. He also contended that the partnership would provide Yahoo with better advertising.

In particular, he took aim at a study released in July by SearchIgnite. It concluded that the cost of buying keywords on Yahoo would jump by an average of 22%. On the contrary, Varian argued, advertisers will get more bang for their buck. Google and Yahoo have been making a similar argument behind the scenes.

"The report fails to acknowledge that ad prices are not set by Yahoo or Google, but by advertisers themselves, through the auction process. Since advertisers set prices themselves via an auction, the prices must ultimately reflect advertiser values. That process will remain completely unchanged by our agreement."

Varian noted that neither company would be privy to the auction prices of the other. And, he said, Google has thrived not simply by charging marketers each time someone clicks on their ads but by delivering advertising that's "highly relevant" to the terms Google users are searching for. Further, Yahoo will serve Google ads only next to search results for which Yahoo itself has few relevant ads, Varian wrote:

We have found that advertisers are generally willing to pay more per click so long as those clicks result in more sales. We anticipate that our agreement with Yahoo will bring more relevant ads to Yahoo users -- which is better for both advertisers and users.

Varian is a professor of economics, information management and business who's on leave from UC Berkeley. His academic gravitas comes in handy in sensitive situations. He also weighed in when Wall Street feared Google would suffer in the economic downturn.

Google says the search advertising pact, announced in June after merger talks between Yahoo and Microsoft collapsed, was designed to increase competition and help Yahoo remain independent. But the partnership has drawn concern that it would reduce competition in online advertising.

The partnership is expected to begin next month. Google and Yahoo executives say they voluntarily postponed it to give regulators a chance to review it. Attorneys general in California and other states, as well as regulators in Canada and Europe, are also scrutinizing the pact. Microsoft opposes it. The U.S. Justice Department has hired a top litigator to review the deal for possible antitrust violations. Yahoo executive Hilary Schneider said last week that Yahoo was confident that regulators would clear the deal.

-- Jessica Guynn

Photo: Hal Varian. Credit: UC Berkeley