Google Ads: the Largest Auction on Earth
It might sound like a surprise to most people, but Google Ads is in fact an auction. More specifically, it is a first-price auction: the higher someone bids for their website, the higher probability the website will be seen. However, the reality works a lot more complicated than what a traditional auction is. In this blog, I want to discuss how Google uses its own methods and algorithms to facilitate its auction system in Google Ads to ensure fairness and what are some ways advertisers could maximize their surplus on the platform.
To start with, the most important concept in the Google Ads system is the cost per click (CPC), which means that the campaigners would pay for each click on their ads. For CPC bidding campaigns, the campaigner would set a maximum cost-per-click bid – or simply “max. CPC” – that’s the highest amount that they’re willing to pay for a click on the ad. max.CPC is supposed to be equivalent to the internal value of each campaigner. However, under the context of the first-price auction principle, we know that the optimal option is in fact to place a bid that is relatively lower than the highest amount that you’re willing to pay for a click on your ad to earn a positive surplus. Thus, it is wiser to place a relatively lower amount than your internal value for the ad as your “max. CPC”.
However, different from a regular bidding system, another huge factor plays into the ad’s ranking on the page: quality score, which evaluates the likelihood the end user will click on the ad and purchase the advertised product. This implementation, just as the name implies, aims at adding another level of fairness and transparency to the advertising costs that are charged. After all, the end goal of the advertisers is to show their product to their targeted market. Showing their ad on the top page to 100 irrelevant users might not be as effective as showing the ad to 10 people from a core targeted group. According to Google, Quality Score is calculated based on the combined performance of 3 components:
- Expected clickthrough rate (CTR): The likelihood that the ad will be clicked when shown.
- Ad relevance: How closely the ad matches the intent behind a user’s search.
- Landing page experience: How relevant and useful the landing page is to people who click the ad.
These three factors – especially CTR – are directly linked to historical impressions for exact searches of the keyword of the advertised product. I find this strategy to be closely related to the strong tie/weak tie distinction in class. The keywords related to the ad, the ad, and the end user are like nodes and the number of searches the end user makes is an indication of whether the ties between them are strong or weak. If the end user searches for a specific keyword a lot of times, and the keyword is strongly correlated to the advertised product, then it is likely that a tie could exist between that user and the ad (based on the strong triadic closure principle). And the stronger the tie between the correlation of the keyword and the ad, the higher the CTR and landing page experience.
The quality score mechanism also means that ads that are clearly and specifically designed would have better performance under the Google ads system since they can develop strong correlations to specific keywords.
Overall, the Google Ads system is a great example of how the concepts of first-price auctions and strong triadic closure are applied in real life and it is impressive to see how this system expands beyond these principles to improve performance and fairness for its users.
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