Facebook vs. Google: which auction is the best?
Everyone knows that there are a lot of people who use Facebook daily. With over a billion users worldwide, Facebook demands a large amount of web traffic, where a lot of the time is spent on the news feed, scrolling through stories. In a similar vein, Google commands the top spot on the list of search engines, where some billion searches occur daily. This fact allows Facebook and Google to convert their website into virtual real estate, where advertisers can fight and pay for the best advertising spots on the website to get their ads seen by the most people. The interesting part is that Facebook and Google, while it seems like a similar business model, conduct this service very differently.
Google, for the most part, runs a second price auction for their ad space. Essentially, the advertisers all place bids for ad slots, and the winning bidder pays the second highest bid for the ad spot. The issue with this model is that it is highly vulnerable to bidder collusion and shill bidding. Buyers can easily come together and artificially lower their valuations to pay less, or create second bidding accounts through which they can allow themselves to secure the top spot without much of the cost. This creates an issue for Google because this means that they are losing out on a lot of potential revenue if the advertisers decide to collude against the company.
John Hegeman, a software engineer and economist at Facebook, believes that he has a solution to this problem of untruthful bidding. He implements Facebook’s ad revenue structure with an auction called a VCG auction. This auction, named after the trio of economists Vickrey, Clarke, and Groves, adds another layer of complexity into the generalized second price auction that Google runs. A VCG auction takes into account the social welfare lost if the top bidder weren’t in the auction altogether. This caveat actually forces bidders to bid truthfully, and it is much harder to collude to game the system.
A downside that people at Facebook, such as Hegeman, have noted is that this model doesn’t make as much money in the short term as the generalized second price auction could make. In other words, Facebook is intentionally not making as much money as it could. Why is this? Hegeman explains that this truthful bidding phenomenon due to the VCG model rolled out by Facebook encourages advertisers to return to Facebook to purchase more ad space, and also purchase ads that are more targeted to the users. After all, Facebook is all about showing the users what they want to see, Hegeman says.
http://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/