Facebook and the VCG Auction
In class, we have learned about the VCG auction for advertisements. It works by maximizing the total benefit experienced by everyone by giving the most lucrative ad spaces the those who would benefit the most from it. It then charges the advertiser the “harm” that it causes by taking that specific spot, kind of like the opportunity cost for the company. We learned about this type of auction in great detail in class, and what it does is allows companies to bid truthfully for ad space and avoid any of the gaming that comes with the GSP auction.
What this translates to in real life is that Facebook only advertises ads that are directly relevant to the person browsing at the time. If they aren’t the most relevant, then the social harm they cause would increase, and therefore they price the advertiser pays would dramatically increase as well. According to the article, this forces advertisers to properly target ads at lucrative targets, or people that would actually buy the things in the ads, instead of instead of just trying to maximize their own revenue. In the long run they hope that they can sacrifice short term gains for a increase to long term profits. I think that Facebook chose the route instead of the GSP that Google takes because Facebook ads tend to be more prominant. While Google ads are generally off to the sides, Facebook ads are in the feed directly, so having relevant ads can have a greater impact.
https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/