How ads on Google for its own products can impact the prices other advertisers pay

When Google and its sibling companies at Alphabet buy ads on its own search engine, the company says it works to ensure that its participation in the ad auction doesn’t “directly inflate” what the other advertisers in that auction end up paying.

The mechanics of those efforts can be hard to follow if you aren’t familiar with the AdRank system Google uses to decide which ads to show based on how much advertisers are willing to pay and the “quality score” assigned to each ad. Our story on Search Engine Land goes into those mechanics. But the bottom line is that despite Google trying to keep pricing neutral in the auction, just being in the auction can have an impact on its customers’ prices. That’s because of what could be called the “limited shelf space” scenario.

If Google were a store: a cereal scenario

Consider Google as if it were a retailer selling cereal, with brands paying for shelf positioning. There is only so much room on the shelf.

Here we’ve got a scenario in which there are spots for four boxes of cereal on the store shelf, and brands compete for shelf positioning. For simplicity’s sake, let’s assume Google thinks every box is just as likely to appeal to customers and gives each brand the same “quality score.” That score plus the price each brand is willing to pay to get on the shelf determines which brand gets the best position and the pricing. The price each brand pays might look something like this:

Position 1 —  Brand A pays $0.50 per box
Position 2 — Brand B pays $0.45 per box
Position 3 — Brand C pays $0.40 per box
Position 4 — Brand D pays $0.35 per box

Now, consider Google comes into the mix with its own in-house cereal brand. Google says its cereal will compete for positioning along with all the other brands. It aims to neutralize its affect on what the other brands pay by calculating their prices as if Google didn’t win a spot on the shelf. Things change as follows:

Postiion 1 –  Brand A pays $0.50
Position 2 – Google pays $0.47
Position 3 – Brand B pays $0.45
Position 4 – Brand C pays $0.40
GONE – Brand D pushed off the shelf

Notice, the prices the three brands still left on the shelf pay haven’t changed, but Google’s entry means Brand D got pushed out entirely.

Now, consider that next time Brand D is willing to pay more in order to get back on that shelf. Google’s attempt to take itself out of the pricing equation can’t eliminate the inevitable change in competition when there are now just three spots on the shelf for the other brands to vie for.

This is what can happen when Google runs its own ads in the AdWords auction. Google says advertiser prices aren’t affected because “advertisers are charged as if it wasn’t bidding.” That’s not quite the case. Its participation can force the other advertisers to jockey harder for the limited ad spots on the page and increase the odds that at least one advertiser will pay more to maintain visibility. By the mechanics of AdWords pricing, bid changes by one (non-Google) advertiser can have a ripple effect on the prices other advertisers pay.

One can argue Google shouldn’t take up space on its virtual “shelf” at all. However, it’s also hard to argue that Alphabet companies like Nest shouldn’t be allowed to advertise its thermostats on Google, for example.

Either way, there are steps Google could take to be clearer about its role and better inform its customers of steps it takes to address conflicts of interest. To understand more of the complexity, see our story on Search Engine Land.