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Comment by connoredel | Hacker News Reader

That's not how it works at all. It's a market: there is a limited supply of impressions/clicks, and it is _buyers_ who decide the price. Buyers are rational -- I like to take that charitable view at least -- and are bidding less than the value to their businesses of those clicks. CPCs are actually down on average. If that's true, then it must be simply inventory growth: mobile is providing ever more interaction points with consumers.

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Market prices are determined by the intersection of supply and demand, so it is not just the buyers who choose. Google has some say over the supply. They may increase or decrease the supply based on behavior they sense more broadly in search.

It's amazing to see on HN that some of the times I am most right, I am also most downvoted. Life lessons...

Well Google is the intermediary. They can (and undoubtedly do) directly affect supply, demand, and price. They can purchase ad space from a publisher for $0.45, mark it up x, and sell it. They can slow demand by temporarily (even for seconds at a time) by increasing cpc. They can lower supply by lower bids. They could in theory even pre-sell ads when supply is in excess.

Google has routinely increased profits by a huge amount through better machine learning. It's been using statistical optimisation for years. Such a massive jump almost makes me think it must be something like that, because the timing would be about right for a major rollout of a new ads optimisation engine based on their latest AI research, and 25% increase doesn't seem possible to occur naturally just through shifts in supply/demand. Only radically better ad targeting could do that.

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