How Facebook and Google use Auctions
Wired, a monthly Tech magazine published an online article in 2015 stating that Facebook didn’t reach its potential earning according to its chief economist John Hedgeman. Despite earning $4.04 billion in revenue in its second quarter through Advertising, Hedgeman states that the Advertising isn’t the cause of the tech giant’s success. Instead it is the specialized role that Ads play within the company’s services. Hedgman discusses the auction system where services such as Google and Facebook would accept certain ads from advertisers to be placed in their apps and web pages. More specifically, Google’s system known as Adwords uses specific words that the user inputs in their search engine which Advertisers bid for so that their specific ads pop up in the results page. Adwords is based on what we had learned in class known as the second price auction as the bidder who won the auction places the ad by the second highest bidder, which means in reality the highest bidder lost. This, however, is unique to Google as Facebook created its own system called the Vickrey-Clarke-Groves also known as the VCG auction, which was created back in the 1960s.
VCG auction is more specialized than Google’s Adwords as it applies to not only the value of the ad potentially being placed into Facebook’s services, but also how much value the ad contributes to the system or takes away from the system as well as the loss of value from other advertisers who are trying to bid their ads as well. The auction is best functional to multiple advertisers bidding in multiple advertising spots on Facebook as the algorithm maximizes the value of the ads by the value all advertisers would place on that specific ad. Hedgeman noted how Facebook sifts through other things on Facebook in order to effectively find the ad’s value. This in particular is the relevance a particular ad has which has been integrated into the VCG system. Ads with high relevance will show up on the user’s feed higher than every other post regardless of whether the posts are inherently ads or not.
The idea that Facebook’s system caters towards the user’s specific interest and how an ad’s value is placed in comparison to the overall effect it has on the system’s value is incredibly ingenious. As suggested by the article, Google simply doesn’t have this because their goal is to allow the user to find the best ad related to their interest through the second price auction system coupled with search engine optimization. In my opinion, there is room improvement in the efficiency of the VCG system as ads can be valued on many more factors and constraints such as the Ad blockers and hackers. This may yield an inaccurate representation of the overall value a particular ad may have for the user.
Source: https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/