Google CEO Eric Schmidt has played down calls for the search industry to tighten its grip on click fraud by declaring the problem “self-correcting”.

Quoted by ZDNet from a speech at Stanford University earlier this year, the Google CEO said clickfraud could ultimately be solved by market forces, and that PPC firms should “let it happen”.

Firms, he predicted, will start to view fraudulent clicks as an expense of PPC advertising, and that keyword prices would come down as the problem got worse.

He said: “Eventually, the price that the advertiser is willing to pay for the conversion will decline, because the advertiser will realise that these are bad clicks, in other words, the value of the ad declines, so over some amount of time, the system is in-fact, self-correcting. In fact, there is a perfect economic solution which is to let it happen.”

In his speech, Schmidt backed PPC over the pay per impression model, although he admitted “smart but evil” people try to “go around system”.

He said Google engineers think it is “great fun” to try and get ahead of click fraud, “but because it is a bad thing, because we don’t like it, because it does, at least for the short-term, create some problems before the advertiser sees it, we go ahead and try to detect it and eliminate it”.

He added: “Part of what we do is we try to decrease the time, and increase the rate, at which the auction automatically detects that this is a bad click, naturally.”

Both Google and Yahoo currently allow advertisers to request refunds for fraudulent clicks. But with one study claiming advertisers have lost US$800 million to click fraud, many have found the search companies’ approach to click fraud disappointing. The move also comes at a time of keyword deflation as advertisers focus on increasing return on investment.

Last month, Yahoo said it would “provide more clarity” about its click protection efforts and give more transparency to advertisers. The commitment came after the settlement of a lawsuit, which alleged that Yahoo had not done enough to prevent click fraud. It said it would bring in a series of measures aimed at reducing click fraud and increasing visibility for advertisers.