How Google Ensures High-Quality Advertisements
Google has been known (for the most part) to prioritize the search accuracy over higher profit. The company strives to continue to provide high quality and accurate services to its user base while generating the majority of its revenue through advertisements. Google, as discussed in class, uses a variation of the second price VCG auction in which ad placement is based on the price of the bid and the quality of the ad to be displayed. The action calculates Ad ranks for all of the bidders based on the bid times the ad quality, then each bidder pays the rank of the bidder below them divided by the quality of their current ad plus a penny.
If we assume the quality of all of the ads is the same, the auction simply becomes a second price auction where the dominant strategy is to bid your true value. Accordingly, this means that the dominant strategy for googles ad auction is to advertise with only high-quality ads that maximize profit. Lower quality ads at higher bids may even result in second place paying more than first place. For example, let’s look at advertisers x,y,z bids for 2 ad slots for a search. X bids 2 at a quality of 10, y bids 3 at a quality of 5, and z bids 6 at a quality of 3. The ranks of x,y,z are 20,15,18 respectively. This would result in x (rank 1) paying $1.8, and z (rank 2) paying $5 while ignoring the extra penny. No advertiser would want a worse spot for a higher price, so maintaining high-quality ads relative to a keyword’s industry is the second piece of the dominant strategy. Google’s auction encourages advertisers to create high-quality ads while bidding their true value in order to maximize advertiser profits.
Source: https://blog.tryadhawk.com/google-adwords/how-google-adwords-works/