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googlenomics

In the midst of financial apocalypse, the gadflies and gurus of the global marketplace are gathered at the San Francisco Hilton for the annual meeting of the American Economics Association. The mood is similar to a seismologist convention in the wake of the Big One. Yet surprisingly, one of the most popular sessions has nothing to do with toxic assets, derivatives, or unemployment curves.

“I’m going to talk about online auctions,” says Hal Varian, the session’s first speaker. Varian is a lanky 62-year-old professor at UC Berkeley’s Haas School of Business and School of Information, but these days he’s best known as Google’s chief economist. This morning’s crowd hasn’t come for predictions about the credit market; they want to hear about Google’s secret sauce.

Varian is an expert on what may be the most successful business idea in history: AdWords, Google’s unique method for selling online advertising. AdWords analyzes every Google search to determine which advertisers get each of up to 11 “sponsored links” on every results page. It’s the world’s biggest, fastest auction, a never-ending, automated, self-service version of Tokyo’s boisterousTsukiji fish market, and it takes place, Varian says, “every time you search.” He never mentions how much revenue advertising brings in. But Google is a public company, so anyone can find the number: It was $21 billion last year.

His talk quickly becomes technical. There’s the difference between the Generalized Second Price auction model and the Vickrey-Clark-Groves alternative. Game theory takes a turn; so does the Nash Equilibrium. Terms involving the c-word—as in clicks—get tossed around like beach balls at a summer rock festival. Clickthrough rate. Cost per click. Supply curve of clicks. The audience is enthralled.

During the question-and-answer period, a man wearing a camel-colored corduroy blazer raises his hand…. read more

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