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How does Facebook Manage Its Advertisements?

As everyone knows, the current popularity of social media sites such as Facebook, Instagram, and Twitter are making advertising on such sites increasingly lucrative. However, while all of these companies allocate ad slots to buyers, the way they go about it differs from site to site. This article analyzes the way in which Facebook determines what ads to show and how to assign advertisers to slots.

Like we mentioned in class, Google uses the Generalized Second-Price Auction (GSP) procedure to sell its ads, in which each advertiser pays a price for their slot equal to the bid of the second highest bidder. Unlike Google, Facebook uses the VCG procedure, which is based around the idea that each advertiser should pay a price equal to the harm they cause to every other advertiser by receiving the spot they were allocated. According to the article, “the key advantage of a VCG auction is that it encourages bidders to bid a true value by weighing bids against every bidder, not just the next highest bidder.” Thus, just as we had discussed in class, the VCG procedure is extremely valuable in that it makes truthful bidding a dominant strategy, whereas truthful bidding is not always a dominant strategy in GSP, where buyers can often receive a higher payoff from receiving a different spot than the one they would receive from bidding truthfully.

Facebook takes the idea of a VCG auction even one step further by incorporating the social aspect into its allocation of ad slots. It ”weighs ad values against every potential piece of content that could appear in a user’s News Feed. This ensures that the ads with the highest value to each individual show up in a user’s News Feed, but they won’t show up before major events from friends and family” (The Motley Fool). As such, unlike Google, where the best ad spot is always at the top of the page, in Facebook the top ad may appear only after multiple other pieces of non-ad content. The ads are not only competing with each other but also with non-ad content for the top spot in a user’s newsfeed. This is critical to Facebook’s long-term ad potential because it keeps users satisfied with the service–they would be annoyed if an advertisement they deemed unimportant preceded content from their friends. As The Motley Fool states, this strategy “ensures that Facebook’s users only see content that will maximize value for the user, whether that’s something from friends or from a business.” In stark contrast to other sites such as Twitter which show often irrelevant ads at the tops of their pages, Facebook has a good long-term ad business outlook by carefully regulating both the quality and frequency of its ads.


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November 2015