How Facebook Used VCG Auctions to Change Online Advertising
Today more than ever, companies rely on advertisements to increase their profits. Every time I log into Instagram or Facebook, I see an ad for a product or company that is very relevant to me. To accomplish this, Facebook uses a system called a Vickery-Clarke-Groves (or VCG) auction.
John Hegeman, Facebook’s Chief Economist, said that with VCG auctions, “An advertiser will only win this placement if their ad really is the most relevant if it really is the best ad to show to this person at this point in time.” VCG thrives when there are many different opportunities for advertisement spots. The VCG system automatically places advertisers into different ad slots based on how much they value each slot to maximize value. Because of this, there is no way to cheat the auction. Advertisers have to strategically target ads toward a specific opportunity instead of trying to maximize revenue.
So how exactly does Facebook’s VCG auction work? Bidders take non-monetary factors into account other than how much they are willing to pay. Advertisers also include ad quality and the probability customers will interact with an ad. Facebook then calculates the total value based on those factors and places advertisers into specific ad slots. This is how they are able to make advertisements specifically tailored for each individual. John 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.” They accomplish this with VCG auctions.
Google used to utilize a Generalized Second Price (or GSP) auction to determine which ads would appear beyond searches. In a GSP auction, the ad slot is given to whoever has the highest bid. The price the winner pays is the second highest bid. Unlike Facebook’s VCG auction, this system does not take ad slot value into account or allow for personalization. Google now uses VCG auctions to place ads in places other than sponsored searches. It is clear that Facebook’s use of VCG auctions has had a significant effect on advertisers.
Sources: https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/