Ad.

Auction Mechanism

Prof. Suresh K Jakhar

Indian Institute of Management Lucknow
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Bidders
Auctions scheme
Valuations bids

v1 b1
Auctioneer

v2 b2
winner

payments $$$
v3 b3

o A winning bidder gets a utility of ui=vi-pi

v4 b4
o A losing bidder pays nothing and gets ui=0
Previously…

• Seller possible goals: “Maximize Revenue.”

• 2nd-price auction with a reserve price.
• For example, reserve-price=V/2 for the
uniform distribution on [0,V]
• Increase the number of bidders
• Invite Bidders with higher valuations
• Revenue equivalence

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 Now
• Moving from a specific example (single-item auctions)
to a more general mechanism design setting.

• Main Idea: in the presence of multiple goals, we need

to design the right incentives such that the efficient
outcome is chosen.

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 Economics of sponsored search
Search engines Internet users

Advertisers

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https://www.facebook.com/business/help/430291
176997542

https://www.facebook.com/business/m/one-
sheeters/facebook-bid-strategy-guide

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 2nd Price Auction
Extension for
Multiple Items &
Goals

Generalized
Vickrey–Clarke–
Second-Price
Groves Auction
Auction
Used by Facebook
Used by Google

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 Sponsored search auctions
Search keywords keywords
Ad slots

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 Bidding
• A basic campaign for an advertiser includes:
List of : Budget
keywords + Bid per Click
“Hotel booking in Lucknow” $5 I want to spend at
“Nikon Camera d7500DSLR” $20 most $500 a day

• Some keywords have bids greater than $50

– E.g., Mesothelioma

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Click Through rate
0.5%
9%
4%
0.2%
2%
0.08%

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Click Through rate
c4
c1
c2
…
c3
…

ck

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GSP
• The Generalized Second price (GSP) auction
– I like the name “next-price auction” better.

• Used by major search engines

– Google, Bing (Microsoft), Yahoo

Auction rules
– Bidders bid their value per click bi
– The ith highest bidder wins the ith slot and pays the
amount to beat (i+1)th highest bid.

• With one slot: reduces to 2nd-price auction. 14

• Hal Ronald Varian, professor at the University of
California, Berkeley joined Google in 2002 as a
consultant, and has worked on the design of
advertising auctions.
• He is now working as a
chief economist at Google.

https://www.youtube.com/watch?v=tW3BR
Mld1c8

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 Example
v1=10

Slot 1 c1=0.08

v2=8 Slot 2 c2=0.03

Slot 3 c3=0.01
v3=2

Total efficiency: 10*0.08 + 8*0.03 + 2*0.01

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 Example
b1=10

Slot 1 c1=0.08
Pays $8

b2=8 Slot 2 c2=0.03

Pays $2
Slot 3 c3=0.01
b3=2
Pays $1

b4=1

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 John Hegeman
VP, Ads at Facebook

Lead for Ads Delivery (auction systems, Ads Product Analytics)

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• The VCG system provided a way of building an auction
that advertisers couldn’t game for their monetary gain.

• Facebook not only ranks ad against ad, but ad against all

the other stuff on Facebook.

• With the VCG auction, Facebook aims to balance

creating value for advertisers and providing a
compelling experience for end-users.

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 Vickrey–Clarke–Groves

Solution (intuitively): Each player pays his

“social cost” (how much his/her existence hurts
the others).

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 VCG basic idea

Optimal welfare (for Welfare of the other

Payment the other players) if players from the
pi = player i was not chosen outcome
participating when i participates

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VCG idea in single item auctions
Optimal welfare (for
Welfare of the other
• Pi= the other players) if
players from the
player i was not
chosen outcome
participating.

= 2nd-highest value.
= 0.
When i is not playing,
When i wins, the total
the welfare will be the
value of the other is 0.
second highest.

 By VCG payments, winners pay the 2nd-highest bid

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 Example: Single item, multiple bidders
• Each bidder has a value of vi for an item.

• An efficient outcome: sell the items to the

bidders with the highest values.

$70 $30 $27 $25 $12 $5 $2

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 VCG in single item auctions
Optimal welfare (for
Welfare of the other
• pi= the other players) if
players from the
player i was not
chosen outcome
participating.

=30 =0
The winner valuation The other gets
when i is not playing. when i is playing
What is my
VCG
pays 30
payment?

$70 $30 $27 $25 $12 $5 $2

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 Example 2: Selling multiple items

• Each bidder has a value of vi for an item.

• But now we have 5 items!
– Each bidder want only one item.

$70 $30 $27 $25 $12 $5 $2

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 VCG in 5-item auctions
Optimal welfare (for
Welfare of the other
• pi= the other players) if
players from the
player i was not
participating. chosen outcome

=30+27+25+12+5 =30+27+25+12.
The five winners when i
is not playing. The other four winners.

What is my
VCG
pays 5
payment?

$70 $30 $27 $25 $12 $5 $2

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 Truthfulness

Theorem (Vickrey-Clarke-Groves):
In the VCG mechanism, truth-telling is a dominant
strategy for all players.

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Now, proof.

We will show:

“No matter what the others are doing,

lying about my type will not help me”

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 Truthfulness of VCG - Proof

• The VCG mechanism:

– Outcome w* is chosen.
– Each bidder pays:  v j (t j , w*i )   v j (t j , w* )
j i j i

• Method of proof: we will assume that there is a

profitable lie for some player “i”, and this will
result in a contradiction.

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 Truthfulness of VCG - Proof
• Buyer’s utility (when w* is chosen):
 
vi (ti , w )  pi  vi (ti , w )    v j (t j , wi )   v j (t j , w ) 
* * * *

 j i j i 
 
 vi (ti , w )   v j (t j , w )    v j (t j , wi ) 
* * *

j i  j i 
n  
  vi (ti , w )    v j (t j , wi ) 
* *

i 1  j i 
 
 SocialWelf are( w )    v j (t j , wi ) 
* *

 j i 
• Assume: bidder i reports a lie t’  outcome x is chosen.
• Buyer’s utility (when x is chosen):
 
SocialWelfare( x)    v j (t j , wi ) 
*

 j i  30
 Truthfulness of VCG - Proof
• Buyer’s utility from truth (w* is chosen):
 
SocialWelfare( w )    v j (t j , wi ) 
* *

 j i 

• Buyer’s utility from lying (x is chosen):

 
SocialWelfare( x)    v j (t j , wi ) 
*

 j i 
• Lying is good when:
   
SocialWelfare( x)    v j (t j , wi ) 
*
> SocialWelfare( w )    v j (t j , wi ) 
* *

 j i   j i 

• Impossible since w* maximizes social welfare!

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 Example: GSP not truthful
v1=10

Slot 1 c1=0.08

v2=8 Slot 2 c2=0.03

Slot 3 c3=0.01
v3=2

wins slot 1.
b1=10
Expected utility: 0.08 * (10-8) = 0.16

wins slot 2.
b1=7 Expected utility: 0.03 * (10-2) = 0.24 32
 VCG prices
b1=10
Pays $5.625
Slot 1 c1=0.08

b2=8 Slot 2 c2=0.03

Pays $1.67
Slot 3 c3=0.01
b3=2 Expected welfare of the others (without 1):
Pays $1 8*0.08 + 2*0.03 + 1*0.01 = 0.71

Expected welfare of the others (1 participantes):

8*0.03 + 2*0.01 = 0.26
b4=1
VCG payment for bidder 1 (expected):
0.71 - 0.26 = 0.45

VCG payment for bidder 1 (per click):

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0.45/0.08 = 5.625
 VCG Vs. GSP Comparison

Only with one slot, the VCG and GSP are

identical and are equivalent to Second Price
Auction.

With Multiple slots, the Mechanisms differs:

o GSP charges the bidder “i” the bid of the bidder i+1

o VCG charges the bidder for her externality

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