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Googles Use of Auctions

Google has an interest in getting various groups involved when selling something related to their brand.  The high demand of the product is what causes the price to rise, which is why it’s advantageous for Google to use Auctions.  In 2004, Google.Inc shocked the investment world by selling IPO stock for their company via Dutch Auctions when they decided to transition into a publicly traded company.  In a Dutch Auction for IPO’s, instead of having an investment bank determine your IPO price, you allow anybody who is interested to bid according to how much money they’re willing to pay for the IPO.  Then, you can set the actual price of the IPO based on the maximum amount of where your shares will sell out.  This risky style of selling IPO’s is rarely used but it allowed Google to make a lot more money from cutting their underwriting costs and by ensuring their deal wasn’t under priced.

Additionally, Google uses Auctions to sell advertisement space using a system known as AdWords.  This program determines: which ads are displayed on a search results page, how the ads are ranked, and how much each advertiser will pay for each click.  Google determines which ads get displayed on what page based on matching keywords and other target market settings such as geographic or demographic segments.  A single page can have up to 15 advertisements displayed with 3 ads being highlighted at the top of the page, 10 on the right hand side, and 2 near the bottom of the page.  Google uses AdRank to position ads based on their bid, which is calculated by multiplying their maximum bid by Quality Score.  AdRank then orders advertisements from highest to lowest based on their score.  Advertisers pay the price determined by dividing AdRank by Quality score and adding $0.01 more than the next highest bidder.  This unique auction style places heavy emphasis on Quality Score rather than simply a higher bid.  The Quality Score portion of the calculation is determined by making sure your ad and the page where you direct consumers matches the searches you’re seeking.

In class we discussed four different auction styles including English Auction, Dutch Auction, First Price Sealed Bid, and Second Price Sealed bid.  For the IPO sales, Google used a Dutch Auction style because they set the IPO price based on the highest price where all their shares would sell out.  Essentially, this mimics a Dutch Auction because Google gradually lowered their IPO set price until they reached the exact moment when they were able to sell out all their shares.  Most companies refuse to sell IPO’s in this risky manner, but Google successfully implemented this style because investors were anxious over the Google IPO for years.  In this style of Auction, we learned that its advantageous for investors to shade their bid slightly to ensure that if they did pay the IPO price they had a positive payoff from their initial value (value-price paid= payoff).  For advertisements, Google initially sold ads based on their pure bid, allowing advertisers who paid the most to receive their ad higher up.  This traditional style was similar to an Ascending Bid auction and English Auction because if advertisers wanted their ad displayed up higher all they had to do was outbid another advertiser.  Google’s current adopted method of AdWords twists traditional auction formats by incorporating Quality Score.  Instead of the more you pay the better your advertisement slot, like in a English Auction, Google uses Quality Score to match advertisements based on relevance and similarity to pages.  This revolutionary auction style is truly unique, but is comparable to a second price sealed bid auction because it’s a dominant strategy to bid your true value.  The winning advertisements essentially pay the price of second bid because they pay the advertisement price of the second highest bidder plus $0.01.

 

http://smallbiztrends.com/2011/12/google-adwords-auction.html

http://www.techdirt.com/articles/20031023/1543203.shtml

-CDails21

 

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