Small Fish in the Big Ocean: Navigating Google’s New Sponsored Search Policy
Since the beginning of the internet, search engines have been a popular tool for people to access the information they need. As such, companies who own search engines have capitalized on this golden opportunity to profit off of organizations’ desire to have their information displayed first by selling ad words and sponsored ads on different results pages. Google, arguably the largest and most used search engine in the world controlling 90% of global internet searches, is the dominant player in this market. Google made news this week by changing their pre-established second-price auction system to a unified first-price auction system in Google Ad Manager for publishers.
To understand the impact of this decision, it is important to know the concept behind sponsored search and how it connects to second as well as first price auctions. Sponsored search is the process of having keyword-based advertisements show up on search engines alongside the unpaid, or “organic”, results. There are multiple slots for displaying ads on a page, with slots high up on the page being more expensive since users tend to click these at a higher rate. Advertisers pay and bid on “per click” prices – for example, to occupy the most prominent spot on the page, prices per click can range from $1.50 per click for “Keuka Lake” to $50 per click for “loan consolidation”. Things that advertiser keep in mind are their own value per click as well as the clickthrough rate for a certain slot when making a decision about what slot to bid for.
In addition to sponsored search, we need to understand how sponsored search is connected to second-priced auctions – in Google’s case, the Generalized Second Price auction specifically. In a Generalized Second Price auction, bidders place their individual bids, with the highest bidder winning but paying the second highest bidder’s price. This type of auction sometimes yields bids that are not truthful, however, as bidding a value different from their true value could result in a higher payoff for a bidder. This leads multiple Nash Equilibria in a GSP auction as well as deviation from the socially optimal solution to the auction.
The GSP system is one that Google Ad Manager was using up until this week, when the company announced that they will be switching over to a first-price auction. That is to say, instead of bidding a value and paying the next highest bidder’s value, each bidder will simply bid a value and pay that value if they win the auction. In Google’s announcement, they emphasized the driver behind this change as increasing transparency for publishers and advertisers who use the ad platform, as well as improving visibility of the company’s own actions and simplifying the platform for everyone. Although this is Google’s claim, it is uncertain whether the improved transparency will help all advertisers on the platform like Google claimed. Two things are likely to result from this change: Google will benefit from the improved monetization outcomes, as people who bid $10 and only paid $7 per click will now pay $10 per click, and bidders will change their bidding behaviors in reaction to the new rule. Multinational corporations will likely be unaffected by this change and may appreciate the simplification of the process, but it is unclear how this will benefit bidders with smaller marketing budgets who also use the platform, as small companies rarely have the marketing budget to compete with corporations and have frequently spoken out about being unable to out-bid larger companies.
Going forward, it would be interesting to observe the actual impact this change in policy has, both on the profitability of Google and the bidding behavior of advertisers small and large. However, is it important for Google to understand the enormous role it plays in setting ads, and take into consideration that in order to have a health business environment and economy, both small and large player need to exist and operate.
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Articles Referenced:
https://www.monetizemore.com/blog/how-navigate-google-second-to-first-price-auctions/