When Hal Varian arrived at Google as a part-time economic adviser in 2002, he asked the then chief executive, Eric Schmidt, how he might make himself useful. Schmidt suggested that Varian might “take a look” at the way Google sold its advertising because “it might make us a little money”. That was an understatement: in 2011, Google's ad revenues were more than $36bn.
Nice as it would be to give Varian all the credit for this - his textbook was my microeconomics bible - the foundation stones of Google's advertising success had been laid before he arrived. Traditionally, advertising is sold by salespeople who quote prices for advertisements. Google decided to auction advertising space instead. And when Varian, who is now Google's chief economist, took “a look” at the auctions that Google's computer scientists had designed, he found that they were pretty much perfect.
If you search on Google, one set of Google computers tries to deliver the best possible search results; a second set is running an auction with the aim of delivering the most effective ads to be displayed alongside them, in 11 different positions of varying prominence. An auction is run every time a user searches - billions a day.