How Facebook ad auction works and how it is different from Google’s
A standard way for websites to sell their advertising slots is through auctions. What Facebook uses is the Vickrey-Clarke-Groves auction (VCG), and it was built by Facebook’s chief economist John Hegeman. In theory, VCG does not allow the advertisers to game for their monetary gain, and ideally, it will only show ads that people want to see. While this does not allow Facebook to maximize its short-term revenue, Hegeman and the head of ad engineering Andrew Bosworth believe that the long-term revenue will be maximized.
In Facebooks’s approach, which is VCG, they believe that when the advertiser gets a slot, they are essentially taking away the opportunity from another person, so the price of the ad for Facebook is calculated by how much lost will Facebook if that ad is going to show up on the page. VCG works well when multiple bidders are bidding for many different ad slots, and the bidder who wins will be the one who has the highest total value. Due to this, the bidders cannot game the auction, and instead, they have to bid truthfully.
Ron Berman, a professor of marketing at the Wharton School believes that the VCG auction that Facebook uses allows the advertisers to focus on their ads by making their ads better instead of their revenue as there is no way to game the system. Therefore, in the long run, this is beneficial to both the bidders and auctioneers. Bosworth also said that Facebook is creating ads that have better quality and are better targeted to people since people can identify ads that they do not like when they are using Facebook, and this will directly affect the auction.
The system that Google uses is called the generalized second-price auction (GSP), where the advertisers bid on certain keywords. The highest bid will win, paying the price of the second-highest bid. While both the action system for Google and Facebook are successful, they are different since they each fit better to their medium. Google’s medium is search; they want their users to get the information and find the answer that they want as fast as possible so that they can leave the Google website. On the other hand, Facebook’s method is suited to a medium beyond search; they want users to stay on the website for a longer period of time, and their goal is to make people enjoy their time when browsing on the Facebook website. As a result, in Google’s case, there are ways for the advertisers to game it, while in Facebook’s case, advertisers have to bid truthfully and can not game it.
This relates to what we have been talking about in class as we have talked about both VCG and GSP. Bidding truthfully is always a dominant strategy in VCG, so the bidders, who want an ad slot on Facebook, should bid their true value since Facebook utilizes VCG. On the other hand, there is no dominant strategy in a generalized second-price auction, so the bidders do not have to bid their true value for a Google ad slot since Google uses GSP.
Source:
https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/