How the VCG Mechanism is Profiting Facebook
Facebook has been using the Vickrey-Clarke-Groves mechanism to make a profit from its advertisers. In order for Facebook to maximize their profits, advertisers must bid their true value. Facebook gives its top slot to the highest bidder, the second slot to its second highest, and so on. Facebook chose to set its price through auction instead of a fixed price in order to further optimize its profits. Of course, when using auctions, truthful bidding can be a problem. However, Facebook overcomes this issue by using the VCG mechanism. VCG is more optimal than a normal second-price auction because it ensures that the advertisers state their true value and ensures social welfare.
In class, we learned about the importance of the VCG mechanism. The VCG mechanism is essentially a second-price auction that produces matchings which maximizes social welfare. The bidder who values the item the most gets it. The winner of the auction is then charged the “harm” they cause other bidders by receiving the item. Each individual is charged a price that is equal to the total amount everyone would be better off if this individual were not there. The VCG mechanism not only maximizes the total valuation, but truthful bidding is the dominant strategy. This ensures that bidders will not lie about their value in order to gain a better slot or position. Everyone gets the spot they value while paying the “harm” to other bidders. Facebook uses this strategy to make a profit off their advertisements. Facebook only makes a profit if advertisers bid their true value. Because the dominant strategy while using the VCG mechanism is to bid their true value, Facebook is more likely to make a profit using VCG than the usual second-price auction.
Source:
https://www.researchgate.net/publication/345818075_How_is_the_VCG_mechanism_profiting_Facebook
Leo-Hansen, Alexander. (2020). How is the VCG mechanism profiting Facebook?.