Information Week has an article in its September 29th issue that illustrates why regulatory interventions to temper Google’s dominance are folly – things like antitrust scrutiny of the Yahoo! deal. But it takes a little understanding of how markets work.

The article lists all kinds of innovative startups that plan to challenge Google and take the field of search in all kinds of new directions. “The burst of activity over the past 12 months is more befitting a land rush than a market dominated by one powerhouse,” it says. Read it. There’s lots of interesting stuff going on.

But it’s not going just because. It’s going on because there’s a dominant player in the market. It’s going on because venture capitalists, innovators, and entrepreneurs can see the large profit that Google is making, and they want a piece of it. Excess profits act as an invitation and a spur to others, bringing new businesses and business ideas to that market.

If profits are “managed” and “brought under control” by curtailing a company’s ability to make deals (like Google would make with Yahoo!), that signal – that there is money to be made here – dissipates. Fewer innovators come to the market.

A second signal also goes out: “If you come up with something truly revolutionary in this field, we’re going to reward you with a haircut.” That dissuades investors – telling them that high profits will not come to them if they produce something great.

It’s a shame that the federal government is working to stanch the flow of innovation coming to search by going after Google.

Over on Techdirt, Mike Masnick discusses an interesting new survey that highlights the sharp disconnect between how much we claim privacy matters to us and how far we’re willing to go to safeguard it. America Online polled 1,000 users in the United Kingdom, and the results further reinforce what other recent studies have suggested:

The study found 84% of users say they carefully guard their info online — but when tested, 89% of people actually did give away info in the same exact survey.

The AOL survey brings to mind security guru Bruce Schneier’s insightful quip on privacy from back in 2001:

If McDonald’s in the United States would give away a free hamburger for a DNA sample they would be handing out free lunches around the clock. So people care about their privacy, but they don’t care to pay for it.

When presented with the option of sacrificing a bit of privacy for something of value, like a chocolate bar or a free gift certificate, many users are surprisingly willing to dole out data to third parties for commercial use. And the value of personal details to marketers is massive. As social networking sites and ad-serving networks amass ever greater knowledge of our hobbies, political views, and even our favorite music, these sites are getting better at mining data to tailor ads with pinpoint precision, commanding high click rates while sustaining server farms and original content publishers.

Online ads are often irrelevant, and sometimes even downright annoying, but they don’t have to be. Just ask my colleague Christine Hall, who recently discovered a new band thanks to a Facebook ad that was presumably targeted to her individual preferences:

You see, I’m on Facebook. As I surf around on the site, little targeted ads appear on the left side of the screen. Clearly the ads are accessing, directly or indirectly, information I’ve shared with Facebook – even information that I’ve made “private” from regular viewing. The ads I usually get reference my age or the fact that I am married, but they are generally useless – ‘you’re married? click on this link to win $500.’ Riiiiggghhht. Well, finally, one of these ads caught my interest and attention! It was an ad for a band…one I discovered I actually like – Velvet Code! I surmise that the band submitted an ad to Facebook with a search criteria that included “goofy people who fancy electronic music,” because, well, it found me.

Of course, finding a desirable new product via an ad isn’t quite the same as receiving a free chocolate bar in exchange for personal data. Still, it’s a sign that in the future, we may start to realize more concrete benefits made possible by “smart” ads.

Many people rightly value privacy, but it doesn’t exist in a vacuum. There are often tradeoffs between privacy and targeted marketing, and we often underestimate the importance of advertising as a vehicle for wealth creation in the online world.