VCG and how it has revolutionized Facebook’s advertising
Companies rely on their advertising to attract customers but also to make money from other companies advertising on their platforms. Facebook is a prime example of the latter. They have advertisements tailored to their users, but the question is: how does Facebook decide which companies are advertised where and when their advertisements show up? They rely on a system known as VCG, the Vickrey-Clarke-Groves auction, which was implemented by John Hegeman, Facebook’s chief economist. When he joined the team, Hegeman turned VCG, a formerly a primarily academic exercise, into an auction and “applied it to online ads.”
VCG was a game changer for Facebook advertising. It “provided a way of building an auction that advertisers couldn’t game for their own monetary gain” and was eventually applied to more than just ranking ads against one another. VCG was used to rank ads “against all the other stuff on Facebook.” VCG uses the value announced by the bidder to match each bidder to an advertising slot and then charges the advertiser the “harm” done to the next lowest bidder. The harm is the value of the next highest bidder, which they have just lost by being beat out for the slot by the highest bidder. In this matching process, it is a dominant strategy for each bidder to bid their true value, that is, to not bid higher or lower than what they truly think the slot is worth.
Google’s search engine utilizes a system known as “generalized second price auction” for their advertisements in which advertisers bid for a spot on the page using their value per click. Each advertiser is then matched with their slot based on their bid and the pricing then follows that of a second price auction. The highest bidder gets the slot with the most clicks but pays the second highest bid and so on.
Facebook uses the VCG system rather than a generalized second price auction because VCG allows them to personalize the experience for each user. Hegeman says, “Google’s goal is to help you find content as fast as possible and leave Google. Facebook’s goal is to lengthen the time you spend on Facebook—to make it interesting for you and enjoyable.”
Source: https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/