Facebook vs. Google
Link: https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/
In class, we learned about two of the most well-known auction mechanisms for online ads—VCG and GSP. Both systems have been adopted by top companies in the online universe perhaps, most notably, Facebook (VCG) and Google (GSP). When comparing their effectiveness, Ron Berman, a professor at the Wharton School of Business, makes an excellent point. He argues that, “each method suits the medium…The[ir] goals are different…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.” Basically, it is hard to definitively say which system is better. Google places ads mainly on the periphery of pages (along the top and sides), while Facebook likes to incorporate ads into newsfeeds; they have different objectives, so it would make sense that they use different auctioning procedures.
This article explores the claim that, while VCG might not maximize short term revenue for Facebook, their chosen auctioning method does maximize long term revenue. According to Facebook’s chief economist, John Hegeman, the company doesn’t just aspire to gain the highest return they possibly can; instead, they like to insure that ads are personalized to each individual, so that they are not only profitable for the advertiser, but also relevant to the potential consumer. Hegeman asserts that, in the long term, this method of advertising is much more profitable to a company because it matches advertisers and consumers in a way that is mutually beneficial. Considering Google has now adopted VCG for certain ad systems, Hegeman’s claim doesn’t seem to be very far off.
Another significant point to consider when comparing the two systems are their dominant strategies, or lack thereof. As we established in class, bidding one’s true value is the dominant strategy for VCG; however, the same is not true for GSP. This fact seems to make it easier for people to “game” the GSP system while gaming the VCG system is hard to do without collusion between advertisers.
As Berman reasons, it is hard to properly compare these two systems across different companies, given that they have different goals in mind; however, we can agree that both systems must be somewhat competent/successful, considering the high revenue that both Facebook and Google receive from their auctioning activities.