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How Auctions are used in Modern Online Advertising

When you think of advertising you probably have a few conceptual models that come to mind. Whether that’s a television ad, a pop-up that shows before a video on YouTube, or even an old-school print ad. You likely don’t think about auctions when someone talks about advertising. Companies all over the world are making use of auctions on a massive scale every second of every day. Most advertising online is not performed by a committee of people deciding which sites would be best for ads, but instead is run by data scientists, who create multiple reinforcement learning models that decide where a company should invest its advertising budget.

It works a little something like this: A company, like Procter & Gamble, wants to advertise paper towels online. They have a budget of $5 million dollars and need to find out which markets respond best to these online advertisements. They create some test advertisements and see how different markets respond, and once they have some preliminary data the company can begin to pour money into advertising in receptive markets (users who responded well to the “test” ads). This model is continuously refined and goes through thousands of iterations until the model is fully optimized and the ads are purchased effectively.

Where does auctioning come in? Well, if there is a small space on a website, like, then companies will want to know two things: Who typically browses this website, and who is ACTUALLY browsing the website at that moment. Based on a composite of users’ browsing history, website cookies saved on their browser, and recently-clicked on items the algorithm can decide if it should bid for the ad space on There is also a split-second calculation made to see how much that ad should be worth for that particular individual. Let’s say that that particular user is likely worth about $4 max for the ad space. Then the company will bid against other companies and advertising agencies until the highest bid is accepted, and the company gets the ad, which might be paper towels in this case.

Auctioning is how almost all ads are strategically placed online, and are part of the reason why you will get ads for hotels in Oklahoma if you start looking for flights to Tulsa, OK. The next time you see an ad for discount furniture on your phone and wonder “How did they know?”, try and think back to the last few searches you’ve made. If you watched a home remodeling show on Netflix, or purchased a seat cushion online, there’s a 100% chance that the ad you’re seeing is a direct result of that information, or about your general browsing history. Mastercard frequently sells user transaction data to advertisers and corporate agencies multiple times each year, so be aware.


Whether you know it, auctions are behind every ad you see each day online and on your phone.


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