Google AdSense and First-Price Auction
Google’s success in becoming a dominating force in search engines is also fuelled by a fortune made from advertisement networks and partnerships, known as Google AdSense. The program allows advertisers to bid for specific keywords on the basis of cost-per-click (CPC). Essentially, the advertiser bids for specific keywords, and the auction winner’s pay is equivalent to how many times the user clicks on the advertisement. Up until late 2019, Google AdSense was using a second-price auction, sealed-bid auctions, an industry-standard, however, it suddenly shifted to first-price auctions. This movement towards first-price auctions was started by other ad exchange companies a year earlier. But why?
With second-price auction sealed-bid auctions, every bidder needs to bid their true value for the product to reach equilibrium, and the highest bidder pays the second-highest price. This strategy favors the bidder as the winner always pays the second-highest price, providing the winner a payoff that is equal to the Highest bid – the Second Highest bid. In the first-price auction, where the winner pays the price they bid, the highest price, the payoff would be zero no matter if they win or lose. This means that Google, the publisher of the ads, will receive more money from the winning bidder. Nonetheless, all is not lost on the side of the advertiser. When compared to the previous second-price auction sealed-bid auctions, the first-price auction reduces complexity and allows for more transparency in the bidding process. Moreover, advertisers also begin “bid shading” where they have to find an optimal price point that would win the bid while being below their true value to ensure some payoff. In this case, advertisers will submit their highest bit in order to gain information on the current market value for future auctions.
Davies, Jessica. “What to Know about Google’s Implementation of First-Price Ad Auctions.” Digiday. Digiday, September 9, 2019. https://digiday.com/media/buyers-welcome-auction-standardization-as-google-finally-goes-all-in-on-first-price/.