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Why does Google use GSP instead of VCG?

In class, we learned that the dominant strategy in a VCG auction is to bid truthfully. This is different from the GSP auction, where truthful bidding isn’t necessarily a dominant strategy. So why does Google use GSP over VCG for selling ad slots? This topic is discussed on Quora, where posters give several possible answers. Although there is no general consensus, each of the posters provide some interesting insight into the advantages and disadvantages of each type of auction.

Let us first consider why Google chose to implement a second price auction instead of a first price auction. In ad auctions, it is important to remember that auctions take place repeatedly for each keyword and set of ad slots, so each bidder can know approximately the value of a keyword by looking at the results of previous auctions for the same keyword. Therefore, bidders can vary their bid from auction to auction, changing their bid often to reflect changes in the market. This is especially a problem in first-price auctions, where bidders will want to change their bids to be above the second highest bid as slightly as possible. This can cause rapid back-and-forth changes, which puts a lot of strain on Google’s servers. This is less of a problem in GSP, where bidders don’t have as much incentive to bid below their value, because they will only pay the second highest bid if they win.

But why GSP over VCG? One theory postulates that switching from GSP to VCG might cause a short term revenue loss that would not be made up in the long term. This is because under the new system, some prices might be lower than they were in the GSP system, and it would take some time for the advertisers to adjust. Even once the values stabilize, how do we know that the revenue will be higher under VCG? People are not perfectly rational, so it is possible that GSP actually nets more revenue for Google than VCG. Perhaps Google has already done tests, and found that GSP does in fact generate more money than VCG, but we can’t know for sure. A final theory states that VCG is more computationally taxing to calculate, because it requires determining the harm each bidder causes to the others. This calculation quickly becomes difficult as the number of bidders increase. In GSP however, calculating the winners is fairly quick, as it simply involves matching the highest bidders to the best ad slots. For a huge ad system like Google’s, it is important that efficiency is considered.

Whatever Google’s reasoning for sticking to GSP, it is clear that Google is doing quite well with its current system. Perhaps this is the biggest incentive of all for not switching.

Source: http://www.quora.com/Why-does-Google-use-the-Generalized-Second-Price-auction-to-sell-search-ads-instead-of-Vickrey-Clark-Groves

-dfelt

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