Facebook and the Vickrey-Clarke-Groves (VCG) Procedure
Facebook has a lot of active users globally, which makes it a great platform for advertisers who need a way to reach many people with their advertisements. This leads to there being a competition between advertisers to get good slots to show their ads. Advertisers, through these ad slots, get an opportunity to show their ad to help sell their goods or services. The goal of the advertisers is to show the right ad at the right time to the viewers. Advertisers help businesses increase their sales and find new customers. They want to achieve maximum visibility of their ads by reaching as many viewers as they can and targeting the right group of people. By winning a slot an advertiser takes away the same chance from other advertisers. This is a main factor in determining the price of the ad slot. The price is determined based on how much value is being displaced from these other advertisers. In other words, like explained in class, the winner of the auction is charged an amount which is equal to the harm they caused the other bidders by receiving the slot.
Facebook selects and sells ad slots to advertisers via auctions that use the Vickrey-Clarke-Groves (VCG) mechanism. The Vickrey-Clarke-Groves auction is a type of second price closed auction. A closed auction means that all the bids are sealed and the bidders cannot see others’ bids. VCG can be viewed as a generalization of the second-price rule for single-item auctions. Although the winner of a VCG auction is the highest paying bidder, they only pay as much as the bidders they displaced by entering and winning the auction. The amount the winners pay is determined by the bids they displaced by winning the auction. So, the bidder pays less than the amount they actually bid. Therefore, the dominant strategy in a VCG auction is to bid your true value. The VCG procedure creates a system where advertisers are best served by placing bids that reflect the true value of the slot they are aiming for. There are multiple bidders who are vying for multiple ad slots and the winners of the slots are chosen based on the matching that maximizes the total valuation created by all bidders.
With the VCG auction system, Facebook aims to find a balance between creating value for advertisers and providing valuable experience for its users. It is important for the advertisers that they give their true value for the bid and target their ads to the right people. Facebook places ads not just based on certain keywords, but also on how they fit in with everything else on the site.
https://www.linkedin.com/pulse/how-vcg-auction-mechanism-works-behind-facebook-ad-santosh-yaduvanshi