Facebook’s Ad Price-Setting
https://www.facebook.com/business/learn/how-much-facebook-ads-cost
I was interested in how modern websites price their online advertisements, so I decided to look at Facebook’s policy of ad pricing.
Facebook lets advertisers ‘set a budget’ for the ad. This budget can be set as either a daily or lifetime budget for the ad. The advertiser then makes a bid. Facebook uses optimized bidding and uses network matching to make sure your ad is directed at people more likely to visit your website. Facebook lets you reach people based on location, age, gender, interests, what they buy online an offline, and other categories. By using this strategy, Facebook is helping your advertisement get more clicks or reach more people who are likely to be interested in your product.
The Facebook auction work by assigning a total value to every ad in the auction which is based on the amount you bid, the likelihood of achieving your desired outcome from an ad (like a click), and the quality of the ad. The ad with the highest vale wins the auction for the group of people you are targeting. Facebook suggests bidding your true and state that “if you win an auction to show an ad to a person, the actual cost of your ad will be based on the bids of other ads that were competing for the same person- and often less than the amount you bid”.
This method of bidding suggests Facebook uses a sort-of second price auction technique. They say that the highest bid wins the auction, but that the cost of the ad is likely to be lower than your bid, and is related to the bids of other advertisers. This is consistent with the theory we discussed in class, that in a second price auction, bidding true value is the dominant strategy because if you win, your payoff fis positive. Facebook does not make clear whether or not the bids are blind, that is, it does not specify whether or not advertisers know the bids of other advertisers.
It is interesting to see our class discussions play out in real life, and that is it not just a theory. Here, Facebook uses the strategy discussed in class as their advice to potential advertisers.