Google’s Advertisement Auctions: From Second Price to First Price
In the past year, Google has made the decision to change its ad targeting and selling branch, AdSense and AdExchange, from a second-price auction to a first-price auction. Behind the motivation of this change, Google claimed it was to “help advertisers by simplifying how they buy online ads and make it easier for them to buy your ad space”. Specifically, the change was targeted to level the playing field for advertisers in order to address the increasingly complicated advertisement market. With the previous second price auctions, the problem of header bids were complicating the process of advertisement buying. Though we’ve seen that second price auctions in fact offer more clear cut dominant strategies for the advertisers, a first priced auction will also offer its own benefits including a simplified bidding and buying process as well as an easier budgeting process. While it seems that advertisers may end up paying an increasingly higher price for advertisements as they now have to pay their highest price rather than the second highest price, this would in fact not happen because buyers will adjust their bids in order to accommodate the changing auction style. In a recent article published in September, 2022, the effects of these changes should be relatively beneficial to all – leveling the playing field, potentially increasing publisher revenue, as well as not having buyers not paying significantly higher prices as they will self-adjust.
Delving into Google’s change to AdSense pertains to the Networks class as we have been discussing auctions, and more specifically first and second price auctions. Auctions are scenarios in which there are one or multiple sellers trying to sell items to the highest bidders. In first and second price auctions, unlike ascending or descending auctions, all the potential buyers submit their bid at the same time. Then in first price auctions, the item being sold will go to the person with the highest bid and they will pay exactly what they had bid. In a second-price auction, however, the item still goes to the bidder with the highest bid, but in this case the highest bidder pays the second highest bid. Though this may seem like it’s much more disadvantageous for the seller, the second price auction is actually very powerful in its application. In a second price auction, the dominant strategy for every buyer is to simply bid their value. Regardless of what others are doing (i.e. if they’re cheating or not), the best possible strategy a bidder could do is to bid their own value. This makes logical sense as in the case you win, you’ll always pay less than your value which is a net positive transaction for you. Even in the case your bid is not the highest, you will gain and lose 0 still, resulting in a non-negative transaction. Choosing to bid a price higher than your value would not be smart because in the case you win, there is a possibility that you will have to pay higher than your actual value for the good, resulting in your net value to be negative. There is plenty more to first and second price auctions, but the general idea was as followed.
References:
Google’s Shift to First Price Auctions: The Effect on Publishers
Google’s AdSense moves to First Price Auction
Google’s First-Price vs Second-Price Auctions