Real-time bidding: a new weapon in bidding war
Three months ago, Facebook launched a new marketplace called Facebook Exchange (FBX). It is a new auction platform that provides real time information about users’ online activities to its clients and allows the clients to bid for the ad slots that target the right users based on that information. It first offers the information of the users who just reviews a certain page or makes a specific click, and asks the clients to bid according to this information. The mechanism of real time bidding is still based on generalized second price auction, but this transaction is done in a very short period of time and therefore speeds up the bidding process and makes the market more efficient.
The article suggests that based on the partners using FBX to deliver ads, Facebook’s real time bidding is doing a better job than Google’s. The results indicate that due to this new platform, Facebook is able to compete with Google, who has a dominant position in the online advertising industry and employed real time bidding earlier than Facebook. The partners claim that FBX currently “generates as much as four times the return on ad dollars than other real-time bidding systems” and advertisers are making $5 more for every dollar spent on FBX.
Undoubtedly the development of technology has a great impact on the forms of auctions. Nowadays, due to the rapid growth and the dynamic nature of the Internet market, traditional generalized second price auction, which allows the buyers to name their price based on inventory and set a fixed click through rate for an ad slot, cannot fulfill the needs of the clients anymore. In the text book, section 15.7 addresses the concept of ads quality, and real time bidding takes ads quality into account. The ads quality is associated with the changing click through rate and this will be reflected in the current users’ online activities. RTB will detect these activities and inform the buyers. Buyers will accordingly adjust their valuation for the ad slots and bid for the most suitable one. According to the article, in 2015, about 27 percent of the money spent on online display ads in the U.S. will come from real-time bidding, and this year the portion will be about 16 percent. This rapid increase in its market share, I believe, is due to three advantages of real time bidding. The first advantage is that buyers can accurately allocate their limited budget and minimize the waste based on the newest information. The data for a certain ad slot is up to date so the buyers can determine whether this slot is the most available one for their target audiences. The second advantage is that ads companies such as Facebook and Google can make more profits. This advantage is clearly shown by the above article. The reason that Facebook launches real time bidding is because it believes RTB will revive its advertising service and this new system indeed works as Facebook expects. The third advantage is that users can receive more targeted/relevant ads and this will improve their online experience. They will receive more information they are interested in and save a lot of time on browsing irrelevant ads online.
However, RTB can also cause some serious issues in long term. Since the price for ad slot is always changing in RTB, it is possible for sellers to modify the price according to the bids and buyers will not be able to tell the altering in the price. This trick may bring high revenues to the sellers in short term, but buyers will eventually discover the truth and lose their trust in such an auction system. They may lower their bids because they know the sellers will change the price for the ad slot if the bid is too high, and this will harm the nature of second price auction in long term. The reason that GSP and RTB are employed extensively currently is that these auction systems can produce a win-win situation for both buyers and sellers, and this trick will destroy such a situation completely. Therefore, in order to maintain the benefits of second price auction, providing a transparent RTB system to the clients is crucial.
— Abeno