Are Search Engines Doing Everything They Can to Prevent Click Fraud?
A pay-per-click approach to ad pricing initially seems to be the most fair, reasonable way for search engines to charge their advertisers. But what happens if these clicks are not legitimate? In many cases, an advertiser’s competition may click (either automatically or manually) many times on a particular ad in order to exhaust their competitor’s advertisement budget before the day even begins, driving away sales from their competitor and hoping to divert sales to themselves. An advertiser may end up paying an inordinate amount for ads and not yield any additional return, while search engines profit in the process. However, as click fraud becomes a larger issue, many search engines are developing advanced approaches to prevent click fraud and ensure that advertisers are not paying more than they need to. Google, especially, seems to be leading the charge in the prevention of click fraud. According to its Ad Traffic Quality website, Google actively uses real-time filtering and manual inspections in order to prevent click fraud, often before advertisers are even charged.
Some research has been done as to how click fraud affects advertisers’ bids in second-price auctions, which we have discussed at length in class. The conclusion is that if the relative frequency of click fraud is known, then advertisers will lower their bids proportionally, so that the auction outcomes and search revenues remain unchanged. However, if the frequency of click fraud is unknown, search engine revenue may rise or fall depending on how competitive the auction is. When the auction is very competitive, search engine revenue is likely to decrease because advertisers bid below their true value in order to hedge against the risk of click fraud. When the auction is less competitive, advertisers stay in the auction because the risk of click fraud does not outweigh the profits they would forego if they exit the auction. In this case, search engine revenue increases because the additional fraudulent pay-per-click revenue is transferred to the search engine, not to the advertiser.
Since search engines like Google can profit from click fraud in certain situations, it seems strange that Google has implemented ambitious efforts to fight pay-per-click fraud. However, there is more that can be done, although the potential solutions would likely decrease Google’s revenue in the process. One potential solution is for Google to use a neutral third-party regulator to prevent click fraud, as opposed to using their own internal processes. Another potential, but far more extreme, solution is that instead of pay-per-click pricing, search engines should consider a “pay-per action” setup. In this scenario, search engines charge the advertisers only when a consumer clicks on an ad and completes some action, like filling out a form or signing up for a newsletter.
It would be interesting to see how valuations, prices, and bidding strategies change in an auction where prices are determined by consumers’ purchasing actions rather than mere clicking, or when a neutral third-party click fraud regulator is utilized.
https://archive.nyu.edu/bitstream/2451/27630/2/search_advertising2.pdf
https://www.google.com/ads/adtrafficquality/how-we-prevent-it.html