Bid Wars – Why Overbidding Leaves You Vulnerable
Advertiser A might be more than happy to continue to maximize volume and pay $1.41 per click, but there’s still no reason to overbid. If Advertiser A’s bid was closer to the actual CPC to begin with, increased activity from Advertiser B would result in an increase in Advertiser B’s actual CPCs, Advertiser A would get more data on CPC vs. CTR by rank, and a standard bid war would develop. The result might actually be the same, but Advertiser B would need to be with paying their increased bids at every step. In extremely competitive auctions with only a few key players, you can often run into huge drops in CPC by position; in these cases top-position advertisers might consider lowering bids to ‘keep competitors honest’ and force them to pay their bids.