[patio11]

I'd hesitate at calling AdWords an auction. It is a non-transparent black box process, some aspects of which are auction-like. (And I like Google.)

If it were an auction, the highest bid would win every time. That is catastrophically untrue with AdWords -- quality score, account history, Google's desire for variety, and a few hundred types of secret sauce mean that lower bids routinely float over higher bids for the same keyword.

Contrary to what many people believe, Google also sets essentially a reserve price on their keywords -- if you manage to discover a credit card keyword that nobody has ever used before (highly unlikely, but roll with it), that is probably worth well in excess of a dollar per click to you. Will you get it for 5 cents? Nope. Google will establish the minimum somewhere close to neighboring keywords, and you'll end up paying over a buck to be the only add on the screen. (Real auctions have a word for when you're bidding against the house, but I'll try to be polite.)

[koepked]

The highest bid does win every time, if you realize that a bid in this situation constitutes more than just price. Price is one way to motivate a seller to perform a service for you. In this case, another way is to have a great site to match your service, which contributes to the overall reputation of the AdWords program. There are also other ways to motivate, and all the secret sauce you commented on is probably to handle them. Add up all of this motivation and call it a bid, and the highest bid wins always, even though the highest price may not.

[berrow]

Aside from the lack of full transparency, are you saying that generalized second-price auctions are not really auctions or that auctions with reserve prices are not really auctions?

[patio11]

I'm saying that if the auctioneer can assign prices unrelated to the content of bids received, then yes, that is not an auction.

Compare with eBay, a true auction:

Single bid at 5 cents, hidden reserve of $1 (eBay): no sale takes place.

Single bid at 5 cents, hidden reserve of $1 (Google): no sale takes place.

Single bid at 5 cents with maximum bid of $1, hidden reserve of $1 (eBay): no sale takes place.

Single bid at 5 cents with maximum bid of $1, hidden reserve of $1 (Google): sale takes place at $1. (I think almost nobody knows this happens.)

Two bids of 5 cents and $1 (eBay): the bid of $1 wins.

Two bids of 5 cents and $1 (Google): the side who Google says wins, wins, at a price which is somewhere between 0 cents and $1.