Facebook’s Use of a Modified VCG Procedure for Organic Ad Placement
The Vickrey – Clarke – Groves procedure is a way of allocating multiple items to multiple sellers that assigns items in a socially optimal way. It functions in a similar fashion to a sealed-bid second price auction but is generalized to be able to distribute more than one item. This procedure has been developed by William Vickrey, Edward H. Clarke, and Theodore Groves and since then has been the primary way many ad placement algorithms function. The VCG procedure works by charging each buyer not the next highest bid like would happen in a second price auction, but rather the harm that this buyer is causing other buyers by taking the item. This procedure works extremely well in applications such as Google search where the value the advertisers get out of each ad slot is somewhat predictable. Each slot has a click through rate, the user is more likely to notice ads that are placed higher on the page, and slots with higher rates are therefore priced higher than others. Additionally, the ads are generally a response to a particular search, the user may be looking to buy something or to use a specific service in their city.
Ads that appear on a Google page in response to a specific search, however, are very different from how ads are placed and valued on a social networking site like Facebook. Unlike with the case of Google search, someone who is browsing through Facebook doesn’t necessarily have a specific goal in mind while doing so. Most people use social media to keep up with the news or their friends’ lives and not to buy a winter coat or find the perfect vacation for next spring. Additionally, there isn’t really a way of generating keywords for which relevant ads can appear. Therefore, Facebook’s ad placement algorithms must be extremely thought out in order to place relevant ads in a way which would not deter users from staying on the website for as long as possible which is Facebook’s main objective.
The revenue Facebook makes from advertising is no joke. Last year, the company made billions of dollars through selling ads alone. Since neither Facebook nor advertisers necessarily know the true value of placing a specific ad in an ad slot, auction-type procedures are still the easiest way of assigning ad spaces to advertisers. According to “Facebook Doesn’t Make as Much Money as It Could—On Purpose,” to make the VCG procedure more applicable its platform, the Facebook team modified the algorithm to rank the ads not only by the harm each advertiser does to other advertisers by taking the slot, but also by the harm the ad would cause to Facebook itself if it was placed in a particular slot against all the other media that surrounds it. We can imagine that if a completely irrelevant ad was placed next to a very touching personal post, both the value of the ad and also of Facebook as a platform would diminish. Therefore, being able to place ads organically and in a suitable context is crucial for the success of social media websites like Facebook. This thoughtfulness of ad placement does not only benefit Facebook but also the advertisers by encouraging them to make high quality ads which could eventually lead to more sales. A lot of people skip over the ads that come up after a Google search, however, it is much more difficult to identify and avoid high quality ads that are placed in appropriate contexts and in a variety of places on a social networking site. Proper implementation of this can even lead people to actively seek out ads that have been placed on their feeds.
In class we studied the basic function and usage of the VCG procedure for allocating multiple items to numerous sellers. To apply this discussion to more real life examples, context for the platform that is running this kind of an auction is certainly needed. For Google search, the unmodified VCG procedure may be perfect, but modified versions can also be extremely useful in other contexts or applications such as organic ad placement used by Facebook.
Sources:
https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/
https://www.nytimes.com/2021/07/28/business/facebook-q2-earnings.html