A Vickrey Auction Put Into Perspective: The High Price of Internet Keyword Auctions
http://www.gsb.stanford.edu/news/research/econ_ostrovsky_internetauction.shtml
The article discusses how search engines such as google and yahoo do not use the original Vickrey auction for advertisement but rather a modification based off of Vickrey’s ideas. This changed auction style leads to confusion amongst buyers. The buyers in this case are the advertisers and what they bid on is the the spot for their advertisement, a better spot can lead to more clicks and thus more revenue and traffic for their sites/products. They bid on a specified amount per click. In the current search engine system, advertisers are charged the next lowest bid plus one penny. Michael Ostrovsky of the Stanford Graduate School of Business states: “unsophisticated bidders can end up overpaying in the current auction system, and sophisticated players can end up sinking inordinate amounts of time and money into figuring out how to beat the system…discerning bidders see that underbidding is often still the wiser strategy…it’s not a true Vickrey mechanism..this set up may result in volatility.”
This article intrigued me with its introductory paragraphs. From our knowledge of a Vickrey Auction (2nd price, sealed auction), whoever wins the auction would pay the second price, so I was curious as to why they would add one cent to the 2nd price, and why Ostrovsky believes that is not the best plan for buyers.
According to Ostrovsky, in a true Vickrey auction, the pay would amount to the measure of the “externality”—or the value of lost clicks—the advertiser imposes on others by pushing them down in the ranking from, say, the number two to the number three slot.
He provides an example:
“Suppose there were three advertisers truthfully bidding 10, 8, and 7 dollars per click, respectively, and three advertising slots, receiving 100, 70, and 50 clicks per hour. Then the presence of the first advertiser moves the second one from the top position to the next one, thus costing him 30 clicks per hour at $8 per click, and moves the third advertiser from the second position to the third one, costing him 20 clicks per hour at $7 per click. Hence, the total externality that the first advertiser imposes on others is $240 plus $140 equals $380 per hour, and he would be charged $3.80 per click in a Vickrey auction. In contrast, under modified Vickrey, the the first advertiser would be charged $8.01 per click, giving him 100 clicks per hour and leaving him with the profits of approximately $200. If, however, he reduced his bid from $10 to any value less than $7, he would be placed in the third position. He would receive only 50 clicks per hour, but would pay only a very minimal price, giving him much higher profits.”
This gives me a new perspective on the Vickrey auction. I thought at first that paying the 2nd highest bid + 1cent is essentially the Vickrey auction. For instance, without the + 1 cent, the advertiser would still have to pay $8.00 in the example given. However, bidding the true value in that case is not the dominant strategy as we learned in class. Then again, Ostrovsky argues that way is not a true Vickrey auction. Ostrosky ideas gave me new insight on how what seems like a Vickrey auction could be tricky, and that there are other ways to calculate what to charge than the 2nd highest bid.
-tw267 “Happy”