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Google and Auctions

Posted by DK on May 26, 2009

I just read a fascinating Wired piece on Google. While Google’s use of auctions to sell ads has been well-publicized, I did not know how pervasively Google uses auctions in its own operations. Consider the following excerpt:

Google even uses auctions for internal operations, like allocating servers among its various business units. Since moving a product’s storage and computation to a new data center is disruptive, engineers often put it off. “I suggested we run an auction similar to what the airlines do when they oversell a flight. They keep offering bigger vouchers until enough customers give up their seats,” Varian says. “In our case, we offer more machines in exchange for moving to new servers. One group might do it for 50 new ones, another for 100, and another won’t move unless we give them 300. So we give them to the lowest bidder—they get their extra capacity, and we get computation shifted to the new data center.”

It sounds like Google has constructed the most transparent market every created (to Google at least), given its ability to capture every piece of data associated with a search and keyword. The article goes on to describe Hal Varian’s role as Google’s chief economist and his efforts to track billions of clicks via the Keyword Pricing Index (Google’s version of CPI).

The Keyword Pricing Index is a reality check. It alerts Google to any anomalous price bubbles, a sure sign that an auction isn’t working properly. Categories are ranked by the cost per click that advertisers generally have to pay, weighted by distribution, and then separated into three bundles: high cap, mid cap, and low cap. “The high caps are very competitive keywords, like ‘flowers’ and ‘hotels,'” Tang says. In the mid-cap realm you have keywords that may vary seasonally—the price to place ads alongside results for “snowboarding” skyrockets during the winter. Low caps like “Massachusetts buggy whips” are the stuff of long tails.

Geeks will be happy to hear that Varian credits Harry Seldon, the mathematical icon in Isaac Asimov’s Foundation novels, as the inspiration behind his career.


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