Internet search engines such as Google and Yahoo! make billions of dollars each year by selling slots for internet advertising. Whenever a user enters a search on the website the results page will contain relevant results as well as advertised links. Companies are able to bid on different search queries in order to gain access to a target market. Historically, internet advertising started charging customers base rates to run advertisements a set number of times. The next evolutionary step was developed by a company called Overture. Their idea was to charge advertisers  per number of clicks their advertisement received and to enable advertisers to choose certain keywords in order to target a specific audience. This method was very successful but over time flaws were exposed. Google recognized that the strategy was not maximizes revenue because it was not optimal for advertisers to bid the true value they had for slots. To solve this they developed a form of second price auction called GSP.

Generalized second price auctions (GSP) are similar to the previous method in that it charges advertisers by the number of clicks their advertisement receives and allows them to target keywords. The major difference is in the auction mechanism. Advertisers do not want to pay any more than they have to in order to obtain a slot. Advertisers will only bid marginally above competitors and in the fluctuating market of internet advertising this meant that bids became much lower than companies would have been willing to pay. Google solved this by using the second price auction format which has the highest bidder i win at a the price of the second bidder p_i+1. This encourages advertisers to bid their true value because their bid only effects if they win, not the price they will pay. GSP is run slightly different by different companies. Yahoo! bases advertisements solely off who has the highest bid for a certain keyword. Google, however, uses another factor called quality score that ranks the quality of an advertisement in order to determine how likely it is that users will actually click on the advertised link. While this is a subjective score, Google uses it because a high bid is worthless if nobody clicks on the advertisement.

How advertisers select keywords is also something worth examining. Advertisers have the opportunity to choose a word of phrase that they wish to advertise with. However, this does not explain what happens with queries that do not exactly match that phrase. Google offers their customers a range of options in terms of search results. The broad match option will allow the advertisement to appear for searches that contain either or any of the words in the keyword phrase chosen as well as other relevant variations of the phrases. This option allows users to access a broader group of people who may or may not be searching for their product of services. The phrase match option allows advertisers to appear if the query contains their phrase, even if it contains other words. Exact match narrows the potential spots to queries that contain the keyword phrase and nothing else. These options allows advertisers to limit their clicks to people who are specifically searching for that particular phrase, potentially saving advertising costs spent on people who would not use the service. The final option is negative match. This option allows advertisers to enter in additional words such that their advertisement would not appear if those words were in the search. Again, this option allows advertisers to narrow their target market and focus on people who may desire their product or service.

http://www.benedelman.org/publications/gsp-060801.pdf

http://www.netinst.org/Chen-He.pdf

http://adwords.google.com/support/bin/answer.py?hl=en&answer=6100#phrase

http://adwords.blogspot.com/2008/11/reach-more-customers-with-broad-match.html