How Changing From Second-Price To First-price Auctions May or May Not Change The Flow of Sponsored Search
Google Is Moving The AdSense Auction From Second-Price To First-Price
Google recently announce that it will be moving its AdSense auction from a second price auction, to a first price auction. Adsense is Google’s program and platform for companies or groups with websites to advertise their products, or more specifically, have their products targeted to users so they have more traffic their way (source). According to the article, Google says this change but they will not truly notice a difference in their revenue. In Google’s FAQ about the topic, they mentioned they cannot predict how it will impact the ad publishers would be impacted, but they believe it might stay the same as before, with no real substantial change.
This article and this decision by Google in the long run will show whether or not for sponsored search and ad pricing, first price auctions are better than second price auctions. We’ve discussed in class that in the past we’ve seen places like Overture use first-price auctions, and seen that they can get too chaotic and end up not really benefiting any parties involved.
Based on our class discussion of Second-price auction, it is surprising that Google would make this switch considering that second price auctions make the bidders bid more truthfully. Now, there is a bigger change for these groups to be a little less truthful and bid underneath their true Ad value, which will not help Google in the long run with their revenue, but perhaps will, contrary to Google’s initial thought, increase revenue slightly for users. We’ve also spoken about the chaos that may come with first-price actions for advertisement and even spoke about Overture’s specific experience with this particular model. Adsense has been successful since its launch and it’s where Google makes most of its profits. Although Google says that this will make ‘ad buying easier’ (via Google FAQ), it may not make it easier for Google to make more profit unless they figure out a way to maximize the truthfulness of ad publisher’s bids.
In our class discussions, we’ve also spoken about the payoff that the bidders get in a second price auction because it’s usually not the winner’s value that gets paid, but the second highest value instead. This means there’s almost always a payoff for the bidder. Because this is not possible with truthful First-Price bids (payoff is 0), bidder’s are less truthful about their bids and values and avoid bidding their actual values. This is due to the fact that they will not make payoff off of them as they would have with a second price auction. So although the ad publishers may not see this lack of payoff when the new auction is implemented, they will realize that the payoff in the auction they had before (in the second-price) will no longer be there, and winning the bids became a little more challenging as you need to figure out a strategy to make sure you win the auction and get the clicks you want for your site.