I am not an economist, so I don’t know a lot about Giffen goods, but the quick write-up at Datawocky asking whether search marketing is a Giffen good explains the concept of a good where demand increases as prices increases:
The classic example is staple foods such as rice, wheat, and potatoes. As their price goes up, poor people on a tight budget actually consume more of them, because they are forced to cut back on luxuries such as meat, but still need the same number of calories to survive.
Two technical points spring to mind:
- This only works when the market price of the good increases – a single supplier can’t expect to raise their prices and gather increased demand as would happen with regular price elasticity (in the rice example given, one rice supplier can’t increase their price and gather increased demand – it needs to be a market price rise)
- It relies on there being a more expensive substitute (or near-substitute) as in the meat vs. staple grains example.
Datawocky argues that this could apply to search marketing (i.e. paid search):
In an economic downturn, companies get more cautious with their marketing budgets, moving more dollars into measurable and direct channels such as search advertising while cutting back on less-measurable brand advertising. Thus, there is more competition for the clicks, driving up the price (cost-per-click, or CPC) of search ads.
(The model is slightly different because the auction pricing model actually causes the price increase in this example).
Applied to search marketing this basically means (a) it is in Google’s hands (at least in the UK, with their crazy market share) and certainly not in agencies’ hands and (b) it has to stay cheaper than alternatives such as offline advertising for driving immediate sales.
What happens to Giffen goods in a monopoly situation?
If there is only one supplier of rice, and demand for rice increases as the price increases towards the price of meat, then that supplier has absolutely no incentive not to immediately increase the price to just below the price of meat.
Applied to paid search, does this mean that we will see new measures from Google aimed at increasing cost per click? As long as the price stays less than other forms of advertising per conversion, the theory says that demand should increase as they increase the price up to that point…..
Food for thought.