Earlier quoted context omitted.
Even if that were true, then the value of clicks would decrease, prices would drop, and a new balance would be achieved.
But in the weeks or months before bidding behavior adjusts downward -- pure gravy for Google!
I also don't think that it's a case of increasing impressions. I do however think that it allows them to display more ads, and therefore increases the chances of an ad being relevant, and as a result more clicks.
Because you're now getting accustomed to the results changing as you type, having different ads appear as you complete your query is not more obtrusive than the core function.
As an example, searching for employment tribunal brought up about 5-6 different ads (just in the main results area, not counting the sidebar) whereas without instant, their inventory is limited to three.
I would say that where there are multiple options to a character sequence it gives them better value per ad as well as they can pick the ads that are worth more, until of course the character sequence excludes them.
So in the end, you've got increased inventory and better value per ad for Google, increased speed and responses to users. Win-win
Though there are more than two parties in the search ecosystem, the tail-optimised sites are going to be left out in the cold, not necessarily the small ones, but anything that relies on 2nd page or below the fold traffic.
This may or may not be a good thing for the internet, but it's going to hurt a lot of companies.
By the way, not sure if anyone else has noticed this, but it's got a definite sense of history enabled as well, with subsequent queries for the same terms being much quicker to latch onto the directions chose in previous instances.