• Los Angeles Times, Wednesday, September 17, 2008 11:30 AM

In a blog post, Hal Varian, Google's chief economist, countered growing criticism of the search giant's proposed partnership with Yahoo by pointing out that Google AdWords prices are determined by the market demand for certain keywords. In particular, Varian took issue with a study from SearchIgnite claiming that the cost of buying keywords on Yahoo would jump by an average of 22%.

"The report fails to acknowledge that ad prices are not set by Yahoo or Google, but by advertisers themselves, through the auction process," Varian said. "Since advertisers set prices themselves via an auction, the prices must ultimately reflect advertiser values. That process will remain completely unchanged by our agreement."

Varian noted that neither company would be able to manipulate or even be aware of the auction prices, and that if advertisers paid more for ads, they would be rewarded with higher quality leads. "We have found that advertisers are generally willing to pay more per click so long as those clicks result in more sales. We anticipate that our agreement with Yahoo will bring more relevant ads to Yahoo users -- which is better for both advertisers and users."

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