Google occasionally sends me free coupons for $100 on AdWords for the various sites I run. I just blew $100 on advertising on my startup's website.
I set the campaign at an aggressive $2 bid and blew through the whole $100 in a day. I normally would not advertise like that - it was entirely due to the coupon. Then the thought hit me - for people who are paying for advertising, I just totally screwed over their auto-bid CPC with my high rates.
In aggregate, are these coupons artificially inflating the cost of ads through Google?
The search page results haven't given me ROI for years. My only use of AdWords is via the network content now. I test my various search terms and check the first Google results page. Then for the top 6-7 results I see if they have AdSense running, quite a few do. I then target an ad specifically for each site in the network content.
Let each one run for one to two weeks and you'll see the performers and the donkeys. Trim the bad ones and search for more. My best performer is a CPC of 0.20 cents, 4% CTR and 20% conversion of click throughs. You can't get anything like this on the main searches.
It is an auction system, so any free money will increase the price.
Think of it as supply vs demand.
Supply = available ads
Demand = $ buying ads
Supply doesn't change, demand increases, so price must increase. Now, you may be overestimating the effect, as @KortPleco points out. But any free money in the system should, in basic economic theory, increase the cost of that good.
I's a real time auction system, so yes they are.You got something for nothing that you used to bid against people who have to pay the full value. But they're probably operating within legal bounds. Have no idea about legislation, but just like coupons in the retail world, there probably are some legal bounds.
But you identified exactly the main problem of the AdWords model. The unpredictability. Imagine this. You have a business and the main method of customer acquisition is these ads you bid on. You can get good at operating it at a profit. Bid just the right amounts, so you're making the right margins. Life is great.
Then all of a sudden, it stops working. Grinds to a halt. You rush to your machine to see what's wrong and the price is now insane. No way you can make a profit. And it can be caused by two extremes. Either someone is really dumb and doesn't know the real value of those specific keywords, and drags you down with him, or you just got a competitor who's massively funded and can afford to throw big money around. Either way, not the best situation to be in.
If they are inflating it then the costs will be minimal in the overall scheme of things. That's simply not enough money to make a dent in any half serious advertiser's budget. My company usually pays over $100 per contact that we get off ads and we spend $20,000+ per month, and we're still one of the fairly small advertisers for google.
There might be small niche areas that see temporary effects, but I doubt that there will be any issues that anybody would notice for more than a few weeks at the most. As you saw, $100 (or $50) disappears in a hurry.
Also I'll add that if somebody is advertising outside their means or bidding higher than they can afford then they might want to take another look at their advertising strategy.