Apple’s Second-Price Search Advertising Auction & the Implications for Developers Planning to Participate in It
Recently, Apple introduced its search advertising initiative on the App store. This is a move that seems to seek to emulate the huge success of Google in leading the search advertising industry. Apple’s search advertising will take place within the App Store application, where 65% of all app downloads are reported to originate. The search advertisements that the user will be presented with will be located above the search bar, aligning with the theme of the user’s search term. App developers who wish to advertise using this new search advertising tool will pay a price determined by a cost-per-tap mechanism—in other words, advertising developers will only have to pay Apple when a user taps on their advertisement. This particular cost of the tap is decided using a sealed-bid, second-price auction.
Thus, the concept of sealed-bid, second-price auctions comes to play in Apple’s approach to cost-per-tap search advertising. The pricing mechanism for this situation takes the form of a sealed-bid, second-price auction. In this case, the bidders are the app developers who wish to install advertisements on the App Store, while the seller is Apple itself. So, according to the second-price auction definition, the highest bidder will receive the item—in this case, the advertisement—but will pay the bid price of the second-highest bidder. So, the optimal strategy for the developers here is to bid their true values, because this will maximize their payoff should they win the advertisement.
The usage of a second-price auction to determine advertisement costs potentially has implications for the advertisement-seeking developers of these apps. If the developers are not well-versed in auction terminology and uninformed about the technicalities at stake here, and end up bidding above their true value for the advertisement, they face severe potential loss. This is because even if they win, since they bid above their true value, they actually face a cost instead of a payoff because the potential revenue the advertisement brings in will be outweighed by the inordinately high price paid for it. App developers are usually not very well-resourced or well-funded, so spending their money wisely is of particular importance to their stability.
Given this truth, the second-price auction in this case also appears to have potential implications for how Apple decides to inform these developers of what these auction technicalities (like the one just referenced regarding optimal bidding) mean for them. Since the concept of second-price auctions is not a layman’s term, Apple should understand that it is crucial to these developers’ financial livelihoods to know what they are getting into as they enter its search advertising domain. As a result, Apple should clearly and directly inform these developers about the meaning and significance of a second-price auction, offering them a simple explanation of what is at stake at this auction and the best way to bid (at their true value) so as to ensure the auction is conducted ethically and fairly to protect all the developers participating in it.