How can we know if paid search advertising works?

Addressing causal problems on major eBay and Facebook

Selection bias in paid search advertising

Google is an interesting firm in that what it sells and what it does aren’t exactly the same thing. What it does is lower search costs through algorithms that match people with other people. But search is not what it sells, at least not exactly. Google’s revenue comes from selling advertisements, most of which comes through search engine marketing, a type of advertising targeting users using certain search words. Google reported around $46 billion in 2012, and 95% of that was from advertising.

Search engines like Google and Bing uses auction to price their advertising. But why do people pay? Imagine ships arrive at the shoreline where my lighthouse waits, hoping to collect a fee to facilitate safe passage. Presumably my bargaining position is based on the fact that without my light, you wouldn’t get to shore. But this reasoning assumes that my lighthouse provides the only useful light around. How strange would it be if other forms of ligh…