In 2010, a A Google product manager named Scott Spencer Interview Explaining Google’s use of “second value” auctions to serve ads across the web. In a second price auction, the highest bidder wins, but is to pay only what second was the highest bid. Economists like this setup- People Those who perfected it won the Nobel Prize—because it encourages participants to bid for whatever item is actually worth to them without worrying about overpaying. As Spencer explained, “It obviates the need to ‘game’ the system.”
But what if Google was the only gaming system?
The allegation comes in an antitrust lawsuit brought by a coalition of states led by Texas Attorney General Ken Paxton. On Friday morning, a federal judge issued an unchanged version of the most recent complaint in the case, first filed in 2020. The document provides unprecedented insight into how Google misled advertisers and publishers for years by allegedly manipulating auctions in their favor. inside information. As one employee put it in a newly disclosed internal document, Google’s public claim about the second price auction was “untrue.”
The Texas case, facing one of several companies aimed at Google’s control of the auction-driven display advertising market. Google completely dominates every link in the chain between the advertiser and the audience. It owns the largest buyer platform, largest ad exchange and largest publisher platform. So when you see an ad on a website, it’s a good bet that the advertiser used Google to place it, Google’s exchange submitted it to the site, and the site used Google to provide the location. Did. In other words, Google runs the auction, representing both buyers and sellers in that auction.
This presents a clear conflict of interest. As one employee said, quoted in an earlier unsealed version of the lawsuit, “the analogy would be if Goldman or Citibank owned the NYSE.” According to Texas, Google has failed to resist the temptation to use its control of the market to its advantage. The lawsuit accuses him of secretly deploying at least three programs designed to distort alleged second-price auctions. While the existence of those programs was already public, the new unproven complaint provides new details of how they allegedly work.
The first program, launched in 2013, was the oddly named Project Bernanke, as in former Federal Reserve Chairman Ben Bernanke. According to Texas’ description of Google’s internal docs, here’s how it works. Let’s say the highest bid placed through Google’s ad exchange, AdX, was $10, and the second highest bid was $8. In that case, the advertiser who bids $10 should win the auction and pay $8 to the publisher. However, under Project Bernanke, Google will reportedly pay the publisher whatever third-The highest bid was—let’s say $5—while still charging the advertiser the full $8.
What happened to the difference of 3 dollars? According to the complaint, Google will move this to a “burning pool,” which it used to leverage its own ad-buying tool, Google Ads. The filing quotes an internal 2014 document in which a Google employee describes the need to reverse “a worrying 2013 trend”: Rival ad-buying platform AdX was winning too many auctions. According to the complaint, Google used the money in the pool to promote bids that would otherwise be lower than those placed through other platforms. (This may explain why the program is named after Bernanke, who promoted “quantitative easing”—pushing money into the economy—to counter the Great Recession. An internal Google Slides uses the phrase quantitative easing. First, Google tracked how it was withholding a lot of money from publishers and eventually paying them back. But, according to the complaint, later versions of the program stopped doing this as well.
In a statement, Google said, “Ag Paxton’s latest allegation—that we generated a ‘third price auction’ or manipulated our ad exchange—is completely false. As of September 2019, we are running a first price auction, But at the time AG Paxton mentions, AdX was an entirely second-price auction.
A second program called Dynamic Revenue Share reportedly focused on giving Google’s ad exchange a leg up. Ad auctions include not only bids placed through different buyers, but also different exchanges, The winner is not actually the highest bid – it is the highest bid after deductible by the exchange. So, for example, if the highest bid through AdX was $15 and the highest bid from a competing exchange was $14.50, but Google took a 20 percent cut, while the competing exchange only took 10 percent, AdX would lose the bid and Google would not. Make money
The complaint alleges that Dynamic Revenue Share helped AdX win the auction, which it should have lost. Since Google also runs the platform used by nearly every publisher, it gets to see bids coming in from all exchanges, not just its own. According to the complaint, Google will look at all bids under Dynamic Revenue Share and adjust its commission rate to win the auction. The new unsubstantiated complaint quotes a Google employee as saying the system was misleading: “A known problem with the current DRS is that it makes the auction untrue,” he wrote. By allegedly allowing it to adjust its commissions on a case-by-case basis, Google gave itself an advantage over other exchanges that have to worry about losing auctions if their fees are set too high.
The final scheme implicated in the complaint undermines one of the most important aspects of the second price auction. Because the winning bid is never disclosed, no one knows how much they would have been willing to pay.
A program called reserve price optimization reportedly underestimated that benefit. In an ad auction, publishers have to set a minimum price or minimum threshold for the ad impression. If the floor is higher than the bid of the second place, it essentially becomes the bid of the second place. So if the top bid is $10, the second bid is $5, but the floor is $8, the winner pays $8. According to the lawsuit, the RPO program used advertisers’ bid history to artificially inflate those price floors. For example, if a headphone company repeatedly bids $20 to show you their ad, Google can use that information to raise up to $19.90—even if the publisher thinks it’s capped at $10. is of. In other words, Google allegedly used advertisers’ previous bids to squeeze more money out of them.
“How is this good for the buyer?” According to internal records cited in the complaint, a major advertiser asked Google. “Because, let me tell you, it doesn’t. It just drives up the price.” The complaint cites an internal analysis that found the program generated an additional $250 million in annual revenue for Google.
The complaint also cited two Google employees who raised questions about the program. “Doesn’t that undermine the whole idea of a second price auction?” One wrote. “It would turn the system into a first-price auction where the bidder has a stronger incentive to bid less than they are willing to pay. (Just enough to win.) I don’t think both sides will in the long term. for it is desirable.
Another employee put things even more clearly: “Isn’t the RPO basically moving our second price auction – which is considered reasonable – toward the first price auction?”
(While Google switched to a first-price system in 2019, the complaint alleges that the company continues to deploy a version of the RPO program under the codename Bulbasaur, like the first-generation Pokémon.)
“These are mostly false, and contrary to AG’s claims, these adaptations do not manipulate any bidding,” Google said in a statement. More generally, it argued that the lawsuit is “full of inaccuracies and lacks legal merit” and that the display advertising market is highly competitive, a claim detailed in this one. blog post,
It is unclear how the three programs described in the complaint may have applied to advertisers and publishers. In some cases they appear to have extorted money from publishers, but in some cases they appear to have increased advertising spend. Either way, the Texas lawsuit argues, they suppressed competition in online advertising, which would be bad for both sides of the market in the long run. As the case progresses, Google may have to convince a judge and jury that its internal programs were actually designed with the interests of everyone in mind—not just Google’s.
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