Is Adwords an Efficient Market?

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Is it possible to out-think your competition in Search Engine Marketing (SEM)? Are there undervalued queries and traffic sources in Google Adwords, Microsoft AdCenter and Yahoo! Search Marketing (for those outside USA and the UK)? As SEM becomes more popular and with the proliferation of tools generating more market information, is there still a competitive advantage in knowledge?

Taken from Chapter 13; Efficient Market Hypothesis, Jiang Wang (2003);

Definition: A financial market is (informationally) efficient when
market prices reflect all available information about value.
A precise definition needs to answer two questions:
1. What is “all available information”?
2. What does it mean to “reflect all available information”?

So are online advertising markets such as Google Adwords informationally efficient and is the Efficient-Market Hypothesis (EMH) as applied to financial markets relevant?

In an Informationally Efficient market, prices reflect all available information as participants act to maximise return. Behaviour is more uniform, and margins are low as competition is consistent across the market. When all participants have a comparable understanding of the market, from pricing and behaviour to opportunities and return on investment (ROI), market activity is determined more by the circumstances of each participant rather than any advantageous information asymmetries. With Search Engine Marketing the cost of traffic will trend towards the highest possible profitable bid for the most participants.

Google Adwords combined with site analytics can be very transparent. With tools such as the Opportunities Tab, a very generous Broad match, AdPlanner and a few others with practices like exploratory bidding combined with the quantitative nature of the data available, Google Adwords is very close to being an Informationally Efficient SEM market.

Claiming that behaviours in Google Adwords conform to EMH assumes all participants are rational with rational expectations, can access the same information at a negligible price, and only make rational decisions. Where EMH departs from reality and its weakness as a model is discussed in ‘On the Impossibility of Informationally Efficient Markets‘ by Sanford J. Grossman (1980).

Missing Attachment

You wouldn’t believe the impressions

There are a number of influences that can lead to irrational bids and pricing even with good quality information and analysis. They include but are not limited to:

  • Inaccurate Value per Goal
  • Internal or External Politics
  • Misidentified Competitive Activity
  • Emerging Non-Relevant Search Around Targeted Queries

There is a lot of information available for discovering new keywords or Adsense placements to target, and maximising competition is in the interests of the advertising networks. It is certainly a factor but it has not reached a point where it has completely killed competition, at least on some sets of keywords.

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