AdWords and the Nash Equilibirum

Mr. Cringely’s site is always a good source for something interesting that will make you think. The second half of this weeks’ article is about AdWords and how it works internally. Basically over the last few weeks he has been describing an experiment someone was doing to see how AdWords works (I wrote about this back here).

In this week’s update Seeing Is Believing, Cringely wonders if Google is doing something to prevent people from optimizing their site for AdWords by adjusting the Nash Equilibrium point(s) in their algorithm so that Google winds up the long term winner. Google of course denies this, and Mr. Cringley of course doesn’t fully believe them.

Personally I think what was observed was a shift in the equilibrium points, but it was not an intentional effort by Google to do something bad. Rather, from what I have read about AdWords, it sounds like the system is constantly re-evaluating itself and its environment. I would not be surprised at all to find out that the system is capable of adjusting its parameters (to a limited extent, major changes would probably need to be approved/done by humans). I think when the subject of the AdWords article was conducting the experiments, they just happened to pick a time when the parameters were being adjusted (for their particular keywords).

Is adjusting the parameters wrong? No, not if Google wants to stay in business. The internet is a pretty dynamic place and things happen in short time intervals. The probability of someone figuring out how your “system” works is directly proportional to how long it is on the internet. And as soon as some figures out how something works, they try to make it work for them. Adjusting its parameters is a good way to make sure that Google’s AdWords stay relevant and useful and therefore continue to make them money. (And this is more or less what the representative from Google said in the article.)

If anything, I think this is pretty interesting. While reading the article I thought to myself that this topic would make an interesting doctoral thesis. I had to laugh out loud when I read the same thing being said by Google’s AdWords engineer…