April 05, 2005
Click-Thru Fraud Lawsuit
Posted by Christine Hurt

The WSJ is reporting that advertisers have filed a lawsuit against Google and Yahoo, complaining that the advertising fees that they were charged, based on how many Google and Yahoo users clicked on their ads, were fraudulently calculated.  This article grabbed my attention because the Google S-1 listed click-through fraud as a risk factor:

If we fail to detect click-through fraud, we could lose the confidence of our advertisers, thereby causing our business to suffer.

The registration statement acknowledged that the detection of fraud would not only cause Google to issue refunds to advertisers but would also cause advertiser dissatisfaction and eventual loss of advertising revenue. Google stated the risk in terms of markets, not of litigation. The market for online advertising would react and Google would suffer. However, advertisers have chosen to litigate.

More interesting though is the conundrum of how to price online advertising is a conundrum for transaction engineering (to borrow Prof. Gilson's phrase).  My personal opinion is that if you create a system that can be easily gamed, then you take the risk of gaming.  But how do you set up a sytem that either cannot be easily gamed or that shifts the risk of gaming to the party most able to prevent it?  Here, the search engine has all the information on the incidence rate of fraud and detection of fraud, and the advertiser pretty much has to take that information at face value.  How can the agreement be structured so that the advertiser is comfortable with that?

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