Google’s Ad Auction Shift
As we discussed in class, search engines, like Google typically utilize a second price auction to determine how advertisements appear on webpages, and the slots in which they appear. With a second price auction, advertisers’ dominant strategies are naturally their valuation for the ad slot that they are bidding on, thereby encouraging truthful bidding.
Earlier this year, Google announced a shift from their use of the second-price auction for AdSense, to a first-price auction model. Google executives claim that this shift from the second-price to first-price auction format would better “align Google’s AdSense process with other ad selling platforms to simplify the experience for advertisers who can now use a single approach to bidding across AdSense and improve advertiser spending confidence.” Another motivation for the switch comes from the benefit of transparency in Google’s new first-price auction format. The company has promised to supply more information about the price of winning bids following the end of an auction, allowing advertisers to better strategize for future auctions.
Google’s actions of shifting their auctions from a second-price format to first-price actually follows a larger movement within the advertising industry of the tech sector. According to the article from Digiday, “most independent ad exchanges made the shift from second- to first-price auctions around a year ago.”
In lecture, we discussed how because second price auctions encourage truthful bidding, they are commonly used as opposed to first-price auctions where users can attempt to gain the system by bidding less than their valuations for the item. Therefore, it seems logical that by switching to a first-price auction system, Google’s AdSense would decrease in revenue as a result of buyers/advertisers attempting to game the first-price system. However, despite scepticism from critics, Google also claimed that content “publishers will likely not see a change in their earnings, and instead they expect the impact of the move to a first-price auction to be neutral.”
However, companies like Facebook, utilize the VCG auction model. With a similar intent to Google, Facebook utilizes VCG to attempt to create a system in which buyers/advertisers can only be successful in their bid if they place a truthful bid on each item, and also create a better advertising space in which advertisers can feel good about their bids and placement of their ads. In contrast to Google’s new first-price system, Facebook’s VCG remains “black box” in comparison, meaning that the inner mechanics of how prices are formed and what bids were given, remain unknown to bidders. With many other tech companies making the transition to first-price auctions, it will be interesting to see if Facebook will likewise make the change from VCG to first-price for the sake of uniformity across the digital ad market, or for other reasons related to buyer trust.
Clearly the motivations behind the advertising auction system are far more complex than we discussed in class. Additional external factors, such as user and buyer trust, uniformity across the market, and business revenue play a large factor into the strategies that companies implement. In recent years, the topic of trust between tech companies and users has become especially prevalent. As the trend for advertisement auctions and strategies continue to evolve, it is interesting to see how individual companies will respond, and whether they will alter their strategies to prioritize user and buyer trust, or revenue.
https://support.google.com/adsense/answer/160525?hl=en
https://searchengineland.com/google-adsense-moves-to-a-first-price-auction-model-375012
https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/