Facebook’s New News Feed Impacts Advertisement Pricing
https://www.recode.net/2018/3/7/17087468/facebook-ad-prices-increase-algorithm-news-feed
This article discusses Facebook’s recent changes in its News Feed algorithm. Earlier this year, Facebook modified the algorithm so that users now see posts from friends and family with higher frequency than they see advertisements. This change was made with the goal of helping users spend less time on the app. According to the article, this goal has been realized, and advertisements are getting less airtime on Facebook users’ feeds. What this means in terms more similar to those used in lecture is that the advertisements’ number of impressions, or occurrences of it being viewed by a user, is decreasing, causing the cost per impression to increase for these brands and publishers.
In addition to the algorithm change, the article claims that Facebook is also running out of places to put advertisements, which will cause a “plateau over time as Facebook reaches peak ‘ad load.’” What effect will these changes have on Facebook’s ad bidding, which follows the structure of a second-price auction (https://adespresso.com/blog/everything-need-know-facebook-ads-bidding/)?
In this system, an increasing or large demand is equivalent to a large number of bidders. There are multiple “items” being sold, where each item is a slot on Facebook real estate – on the News Feed, messenger page, in groups, etc. – and the demand for each unique slot would be dependent on how much the buyers are willing to pay. As the supply of certain slots decreases, or in parallel, the demand or number of bidders increases, does anything change about the bidding strategy for each of the bidders? If the bidders’ valuations of the slots are constant – independent of how in-demand they are – the answer would be no because the dominant strategy for bidding in a second-price auction is to bid your own value. If, instead, some of the bidders’ valuations are affected by how desirable they are (i.e. an individual sees a slot as more valuable now that more buyers want it), then it is possible for their valuations to increase. In the former situation, which is more likely in an ideal second-price auction, there would be fewer bidders with a valuation high enough to win the bid, so a smaller number of bidders going for the item. I think the latter is possible in a real-life situation of bidders not educated on auction theory due to humans’ susceptibility to mob mentality and the change in the item’s extrinsic value. In that case, I would guess that the basic structure of the bid does not change as much as in the former because the number of bidders does not change when the price goes above bidders’ valuations. Instead, the bidders’ values simply rise with the rising price. Seeing as, as the article states, “Facebook’s ad revenue keeps going up and up,” I think the latter situation is currently what is occurring.