Facebook and the Vickrey-Clarke-Groves Auction
https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/
As advertisements become more prevalent (as well as more customized) on popular sites such as Facebook and Google, competition between advertising companies for these coveted spots increases as well. These sites begun holding auctions where advertising companies bid on pricing for the ads and this is now the standard procedure for online services to accept ads and place them on their websites and applications.
Specifically for Facebook, the algorithm is more complicated than rewarding the highest bid with advertising space. As customized advertisements come into play, the auctions now run off of a modified version of the Vickrey-Clarke-Groves auction, which is an auction mechanism that in theory, advertisers cannot game for their own monetary gain. The goal of Facebook’s system is to award the highest bidder, but also to show their users only ads relevant to their profiles, which they hope will maximize their long term revenue rather than short term revenue from bids. The Vickrey-Clarke-Groves auction is a sealed bid auction which charges each individual using the notion of opportunity cost, or how much the bidder will ‘harm’ the revenue or obstruct the revenue generated by others if they were to win. Facebook essentially translates the advertisers’ bids into a weighted average of how much they value the advertisement space (their bid) and how relevant their advertisement is to the set of end users viewing it. This actually works the best when multiple bidders have valuations for multiple items (advertisement spots) so the VCG mechanism can maximize the total value created by all bidders, a notion of maximizing social welfare of the matching. The end result is that even though the auction setup is slightly different from that of a basic second price auction, the best response of the bidding companies is still to bid truthfully therefore they cannot cheat for their own gain.
Whether or not advertisers are thinking about the game theory concepts behind the auctions, they are essentially being analyzed based on their value and content relative to users, which maximizes revenue for Facebook with the constraint of keeping it relevant for their users.