A Short Answer

Much of the web services and online information is “free” today because of the advertisements shown on the websites. It is estimated that the online ad industry worldwide reached $94.2 billion in 2012. Compared with traditional media, online advertisements' revenue ranked right below TV and above newspapers.

In the early days of the web, i.e., 1994–1995, online advertisements were sold as banners on a per-thousand-impression basis. But seeing an ad does not mean clicking on it or buying the advertised product or service afterwards. In 1997, GoTo (which later became Overture) started selling advertisement spaces on a per-click basis. This middle ground between ad revenue (what the website cares about) and effectiveness of ad (what the advertisers care about) became a commonly accepted foundation for online advertising.

With the rise of Google came one of the most stable online ad market segments: search ads, also called sponsored search. In 2002, Google started the AdWords service where you can create your ad, attach keywords to it, and send it to Google's database. When someone searches for a keyword, Google will return a list of search results, as well as a list of ads on the right panel, or even the main panel, if that keyword matches any of the keywords of ads in its database. This process takes place continuously and each advertiser can adjust her bids frequently. There are often many ad auctions happening at the same time too. We will skip these important factors in the basic models in this chapter, focusing just on a single auction.