The Facebook Experience: Featuring VCG Auctions
https://medium.com/@freeformers_uk/digital-uncovered-4-facebook-ad-auctions-c5a8a58f7a42
This article analyzes how Facebook utilizes the Vickrey-Clarke-Groves (VCG) auction system to sell and optimally place ads on the social networking site. An important element of VCG is how much is lost from the rest of the system when a particular advertisement is on a page. The articles delineates that Facebook calculates this harm by evaluating the relevance of the ad and how much other advertisers would pay for its placement. The dominant strategy would be to place bids that are representative of the placement’s true value. VCG operates in a way such that advertisers who bid very large amounts of money do not necessarily obtain ad space. Instead, advertisers whose ads are of relevance to the users are better positioned to win these auctions. This results in an enhanced long-term experience for Facebook users where ads are more seamlessly integrated within their newsfeed.
As discussed in class, the VCG procedure involves advertisers announcing values in order to create the formation of a matching to maximize total valuation. Each advertiser is charged the harm that taking the assigned slot does to the other advertisers. However, when adapting this model for real-life application, it is important to note that the advertiser will only win if the advertisement is the best to show the user at the specific point in time. It was proven in lecture that truthful bidding is a dominant strategy (the advertisers should believe the auctioneer sets fair prices) and the resulting matching maximizes total valuation. A system, like Facebook Ads, that is built upon VCG values the quality of its content over the short-term revenue it can garner. In contrast, Google uses the Generalized Second Price auction where truthful bidding is not necessarily a dominant strategy. Consequently, it has been noted that there is great effort on part of advertisers to “game” Google’s ad system for its search engine. Nonetheless, GSP auctions have been immensely successful for Google.
On the whole, the VCG and GSP auctions cater to different user experiences. Facebook users tend to use the product for longer periods of time compared to the quicker searches Google entails. Thus, FB ads should be relevant enough to be integrated within newsfeed content and allow for smooth transitions.