ing a computer crime lawyer. Identifying the right people to contact directly is much more expensive than using a search engine. There has been no real competitive response to the new phenomenon of search engine advertising by the broadcast media. All this means that Google and other search engines can offer a uniquely strong value proposition.

Google was not the first company to price and display ads based on search terms or “keywords” and to hold continuous automated auctions to price the advertising of these keywords (that was Goto.com in 1998). However, Google was the first large search engine to use this model, and Yahoo and MSN eventually followed. Google assigns top ad placements to top bidders, but also uses a “quality score” to sort out undesirable advertisers. Besides ads based on keywords and automated auctions, a third unusual feature of search engine advertising is that advertisers pay only when a user clicks on their advertisement. This is not original to Google either—it was used by several different online publishers from 1996 on—but again this is a much more targeted and measurable advertising method than traditional broadcast media advertising where advertisers pay merely to be seen.

our methodology

In our research paper, we use data on lawyers’ advertising decisions to illustrate that Google, Yahoo, and other search engines’ ability to capitalize on the long tail of advertising depends on how easy it is to make a match between advertiser and potential customer. This in turn depends on two things: The number of potential customers (fewer customers = more wasted eyeballs) and the difficulty of targeting niche customers using traditional broadcast media or banner ads.

To examine how match difficulty affects advertiser decisions, we use data from a lawyer Web site portal. The data shows the ad prices that lawyers looking to advertise on Google would see for 139 different law-related keywords in April 2007. A typical example of the variance in prices is that one click on an ad in a top spot on Google for “Truck accident attorney” in Boise, ID costs the advertiser about $12.

there has been no
real competitive
response to the
new phenomenon
of search engine
advertising from the
broadcast media.

In contrast, the same string of words costs about $32 in Montgomery, AL. “Employment attorney” costs about $17 in Boise, but just $5 in Montgomery. We combine this data with information about the popularity of the search terms and about restrictions on lawyer behavior across locations.

We find that search engine advertising generates value through both of the drivers of match difficulty: the number of potential buyers and the difficulty of targeting niche customers. In particular, we show that, controlling for location and search term, firms bid more for keywords when there are fewer customers and therefore a greater need for targeting. This result suggests a possible reason for the price differences between Boise and Montgomery: when there are fewer searches for a string, firms want a way to find these niche customers and they bid the price of that string higher.

establishing causation

Correlation does not establish causation. Higher global temperatures are correlated with a lower incidence of piracy on the high seas, but that doesn’t mean that building pirate ships will reduce global warming. For empirical economists, one of their biggest challenges is working out how to establish causation from correlations in the data.

We found a raw correlation in the data between a lack of searches and higher prices, but of itself this does not establish a causal link between match difficulty and bids for search engine ads. To establish a causal link, we exploit a “natural experiment”

that results from the fact that lawyers’ activities are regulated at the state level, by their state’s bar association. These state regulations mean that you can have two similar states, but in one state lawyers are permitted to do something, while in another state they are not.

Specifically, many state bar associations prohibit “ambulance chasing” behavior. In 15 states, lawyers are not permitted to contact clients directly (electronically or in writing) for a period following “personal injury or wrongful death.” This behavior is permitted in the other 35 states. This restriction affects personal injury lawyers, but it does not affect others. When direct solicitation is banned, it is more difficult for personal injury lawyers to target clients. In the absence of search engine advertising, these lawyers could only use broadcast media to find clients. A key point is that the restrictions do not affect the ability of other lawyers to find clients; only personal injury lawyers are affected.

We show that when personal injury lawyers are forbidden from directly contacting clients, they are willing to pay significantly more for search engine advertising, all else equal. By “all else equal,” we mean we control for the fact the keyword string “truck accident attorney” generally costs more than the keyword string “employment attorney” and for the fact that search engine ads in Montgomery cost slightly more than search engine ads in Boise. Our analysis therefore compares whether personal injury keywords in locations with restrictions cost more than other law keywords in those locations, compared to locations without restrictions. If we exclude all other reasonable explanations for the price difference, then we can legitimately attribute the cost difference to the presence or absence of restrictions on lawyer behavior. We will spare you the complicated statistical details—you can read the full paper for those—but we worked out a way we could legitimately connect the restrictions and keyword prices.

We find that personal injury keywords cost approximately $1 more per click (or 11%) in places where directly contacting clients is prohibited. By making targeting more difficult, the value of search engine advertising in-