Google Chief Economist Hal Varian and his team claim to have done some research into the subject and has concluded that conversion rates just don’t vary much by position.

"Since Google ranks ads by bid times ad quality, ads in higher positions tend to have higher quality and higher quality ads tend to have higher conversion rates," says Varian. "Thus you may see a correlation between auction position and conversion rates just due to this ad quality effect. However, the real question is how the conversion rate for the same ad would change if it were displayed in a different position."

Varian has an answer for that question too. "Another difficulty is that the average position number reported by Google is that it is an average over all auctions in which you participate," he adds. "If you increase your bid, it is quite possible to see your average position move lower on the page! The reason is that when you increase your bid, your ad will appear in new auctions, and it will tend to come in at the bottom of those new auctions. This effect can be large enough to push your overall average position down."

"We have used a statistical model to account for these effects and found that, on average, there is very little variation in conversion rates by position for the same ad," continues Varian. "For example, for pages where 11 ads are shown the conversion rate varies by less than 5% across positions. In other words, an ad that had a 1.0% conversion rate in the best position, would have about a 0.95% conversion rate in the worst position, on average. Ads above the search results have a conversion rate within ±2% of right-hand side positions."

There you have the gist of Google’s research into the matter (via Dan Friedman of Google’s Inside AdWords Crew). More info on the possibility of higher bids leading to lower ad positions can be found here.

I wonder if Google moving the ads on search results pages closer to the organic results has done or will do anything for conversion rates. We have not seen this discussed by Google.

Internet users who have witnessed the rise of Google as the dominant search engine remember what the Web was like before it. Other engines like Altavista did search with varying degrees of success and user satisfaction.

Google’s arrival relegated Altavista and everyone else in search to second place status, if they were lucky. Their rise in search, coupled with a fortuitous entry into relevant contextual search advertising, made it a multi-billion dollar fixture on the Internet.

No one has been able to budge Google from its top spot in search. A discussion of their longevity began when their chief economist, Hal Varian, took questions from readers of the Freakonomics blog.

Varian cited one question as being “quite striking.” Being cynical types here, we think the particular question is just a little too good to be true; it reads like this:

How can we explain the fairly entrenched position of Google, even though the differences in search algorithms are now only recognizable at the margins? Is there some hidden network effect that makes it better for all of us to use the same search engine?

Our pals at Intentional Foul might call this a softball question, which Varian took for a ride out of the park. He responded on the official Google blog to chat about it further.

“The difficulty is that the typical economic forces at work in many technology businesses that lead to entrenchment don’t seem to explain our success,” he said. “If it isn’t economies of scale, lock-in, or network effects, what is it that explains Google’s success?”

The professor answers this by saying Google is better because it keeps doing search improvements continually. He refers to a theory economists call “learning by doing” and what the rest of us might call “practice.”

“Google has been searching the web for nearly 10 years, which is far longer than our major competitors. It’s not surprising that we’ve learned a lot about how to do this well,” said Varian.

We are inclined to think inertia plays a part in keeping people coming back to Google. Index freshness has a role, which we see as even more important. Search at Yahoo, or Microsoft, or Ask works fine, but if Google has even more recent results to tap, that gives them as much of an edge as any ongoing improvements.