How does Google sell ad spaces?

Question 1

Online Ad Space History

Answer 1

• 1994: Impression-based ($ per 1000 impressions)
• 1997: Click-based
• 2002: Auction-based
  
  • Google AdWords system
    
    • Search advertisements / sponsored content

Question 2

Revenue-dependent Variables

Answer 2

• C: average clicks per hour
• R: average revenue per click
• C * R: average revenue in dollar per hour
  
  • aka the valuation

Question 3

Single Item Public Auction Types

Answer 3

• Ascending price
  
  • highest bid may not be true valuation
  • highest bidder may be willing to pay more; wins because nobody outbids him/her
• Decending price
  
  • highest bid is true valuation

Question 4

Single Item Sealed Envelope

Answer 4

• First price
• Second price
  
  • highest bidder pays the amount of the 2nd highest bidder

Question 5

Multiple Items Auction Types

Answer 5

• Generalized Second Price (GSP)
  
  • Google
• Vickrey-Clarke-Groves (VCG)

Question 6

In a Sealed-Envelope, Second-Price auction, if there are three bidders A, B, and C who bids $24, $37, $16 respectively, who is the winner of the auction, and how much does she pay?

Answer 6

• Bidder B wins and pays $24
  
  • In a second price auction, the winner is the bidder who bids the highest amount (Bidder B, who bid $37), and the amount she pays is the second-highest amount (the bid of $24 submitted by Bidder A).

Question 7

Auction Designs

Answer 7

P = Price

b = Bid

U = Net Utility

• First Price:
  
  • P_i(b) = b_i
  • U_i = V_i - b_i
• Second Price:
  
  • induces truthful bidding
  • P_i(b) = b_j
  • U_i = V_i - b_j

Question 8

What is the mathematical definition of Truthful Bidding?

Answer 8

• Buyer’s Bid = Buyer’s Valuation
  
  • Truthful bidding is defined as the case where each buyer submits a bid that is equal to her own individual valuation.

Question 9

Truthful Bidding Second Price (single item)

Answer 9

• a dominant strategy
  
  • b = v

~b = new bid

• why not b < v?
  
  • ~b < b₂ < b
  • before: V - P = V - b₂ = b - b₂ > 0
  • after: 0
• why not b > v?
  
  • ~b > b₂ > b
  • before: 0
  • after: V - P = V - b₂ = b - b₂ < 0

Question 10

What is NOT a reason why Second-Price Single-Item auctions induce truthful bidding?

Answer 10

• Incentive to bid lower than your utility to make a profit
  
  • Second-Price Single-Item auctions do the following:
    
    • 1. Internalizes negative externalities inflicted on other bidders;
    • 2. Decouples the allocation of resources from the payment rendered;
    • 3. There is no incentive to bid higher or lower than your utility;
    • 4. Bidding your utility constitutes a dominant strategy.

Question 11

Let the following GSP auction occur with 3 users and 3 ad spaces. The ad spaces have click-through rates of [50 10 5]’. Bidder A has a valuation per click of 20, Bidder B has a valuation per click of 16, and Bidder C has a valuation per click of 21. Who wins the second ad space, and how much does she pay?

Answer 11

• A wins and pays $160
  
  • In this example, because A values each space less than C (but more than B), it wins the second ad space and pays the valuation of B ($16) for the clickthrough rate of 10, for a total of $160.

Question 12

Auction Variants

Answer 12

a, b = equivalent

• Auction
  
  • Open
    
    • Ascending Price (a)
    • Descending Price (b)
  • Sealed Envelope
    
    • 1st Price (b)
    • 2nd Price (a)
      
      • Multiple items
        
        • GSP
        • VCG

Question 13

Auction Summary

Answer 13

• auctions allocate items among competing buyers
• different auction rules induce different bidding
• pricing based on externality induces truthful bidding

Question 14

Google chooses to use GSP auctions over other types of auctions. What is NOT a reason why Google uses GSP auctions instead of switching to Vickrey-Clark-Groves (VCG) auctions?

Answer 14

• GSP ensures truthful bidding
  
  • GSP does not ensure truthful bidding, while doing all of the other options–VCG auctions ensure truthful bidding.
    
    • Truthful bidding is less important than other concerns to Google
    • GSP is easier to explain
    • Google revenue may decrease due to continued irrational behavior if they switch to VCG