Advertisements: The hidden auctions
The study of auction theory may seem antiquated and unproductive. How useful is it to study crowds of rich individuals holding up signs to purchase wines and collector’s items? Can those really be that common? As it turns out, we are unwittingly part of hundreds of small scale auctions every day. And the object that thousands of companies are willing to bid on daily: our attention.
When the average person browses the internet they are bombarded by advertisements for a wide array of products (unless they have adblock of course). These advertisements are placed there by webpages and ad networks after companies offer bids based on those positions in an ever-growing auction marketplace. Companies curtail their bidding price based upon how likely they think their ad will influence you specifically.
Much of Google’s AdSense system uses a second price auction scheme similar to the one we learned in class. Each advertiser places a bid on a particular individual’s page and the largest bidder is able to place the ad and pays the price of the second highest bidder. This type of auction works well for getting buyers to pay the maximum amount they are willing, but Google and other websites have much more to worry about than simply making the post money per ad placement.
Websites are constantly cautious about maintaining their audience because without viewers they can’t sell ad placements. If viewers find ads irritating or irrelevant then they may leave the website and never come back potentially preventing the website from hundreds of future ad sales. Facebook has customized their auction system to try and solve this problem.
Facebook’s ad system is modeled after a Vickrey-Clarke-Groves auction (VCG). Using this model the paid price is calculated according to how much value is lost by placing this ad on the page as opposed to other ads. This allows Facebook to take into account how relevant the ad is to the user and compare it to how relevant others ads will be to this user. Although this often means Facebook is selling its ad placements for a lower price than it could, it ensures that both the advertisers and the users are happy. The advertisers won’t keep paying Facebook for ads unless they see that it helps their brand reputation or sales and the users will be annoyed by Facebook ads unless they find them relevant. Facebook is sacrificing some short-term income to safeguard their ability to make money in the long-term. Who would have thought auctions are keeping large tech companies alive.
Source: https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/