40 Pages Posted: 15 Jan 2008 Last revised: 19 Jun 2014
Click fraud is the practice of deceptively clicking on search ads with the intention of either increasing third-party website revenues or exhausting an advertiser's budget. Search advertisers are forced to trust that search engines do everything possible to detect and prevent click fraud even though the engines get paid for every undetected fraudulent click. We seek to answer whether it is in a search engine's interest to prevent click fraud.
We find that, under full information in a second price auction, if x% of clicks are fraudulent, advertisers will lower their bids by x%, leaving the auction outcome and search engine revenues unchanged. However, if we allow for uncertainty in the amount of click fraud or change the auction mechanism to include a click-through component, search engine revenues may rise or fall with click fraud. A decrease occurs when the keyword auction is relatively competitive, as advertisers lower their budgets to hedge against downside risk. If the keyword auction is less competitive, click fraud may transfer surplus from the winning advertiser to the search engine. This last result suggests that the search advertising industry may benefit from using a neutral third party to audit search engines' click fraud detection algorithms.
Keywords: Advertising, Auctions, Click Fraud, Game Theory, Internet, Marketing, Search Advertising
JEL Classification: M31, M37, L86
Suggested Citation: Suggested Citation