How is the VCG mechanism profiting Facebook?
How is the VCG mechanism profiting Facebook?
We were introduced to how search engines work in this class recently, and of course, many different mechanisms in the background operate differently, and it is a company’s decision which one to use. Google and Facebook are the two leading companies with the most lucrative online markets and are, therefore, the biggest competitors to each other. Google and Facebook use two completely different strategies to increase their ad revenue, but how do they do it?
This article dived deep into the Facebook ad auction system since they recently changed their approach and started using the Vickery-Clarke-Groves (VCG) procedure to maximize their profits even more. Since it is not beneficial to the bidders to bid below their value, the VCG procedure ensures truthful bidding from the start, which gives Facebook valuable insight into their maximum value for a particular slot which can later be used to target a specific market segment. At the same time, this increases social welfare since the bidder with the highest bid will get the best slot, thus, maximizing the welfare, which may not be the case in the Matching Market as it is not a dominant strategy to bid truthfully.
Previously advertisers or companies had to pay for impressions and not for PricePerClick(PPC), and ever since the market made the shit to PPC, it became more efficient and required more engagement from both parties. Unlike Facebook, Google used a Generalized Second Price (GSP) auction for their ads which was a good strategy but failed in comparison to the power that lies in the VCG procedure. Its power comes from the fact that GSP is useful for a one-time ranking and does not allow for any personalization or, in other words, to fit the needs of the users’ behaviors.
I find it fascinating that the VCG procedure is so useful in today’s world, especially with the ad-revenue system that is inherently complex and requires a lot of calculations to make the best of it. Reading this article about Facebook, one of the top companies in the world in terms of revenue, and learning that all of its profits are based on ads run by the VCG, a concept we covered in this class, is truly mind-blowing. I also like that Facebook is constantly working on improving its model by adding extensions to the model to predict behavior to make super-relevant ads, a game theory put to practice in the real world with millions of users actively using their services.
Source: Leo-Hansen, Alexander. (2020). How is the VCG mechanism profiting Facebook?
https://www.researchgate.net/publication/345818075_How_is_the_VCG_mechanism_profiting_Facebook