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Second Price Auction when adding a Quality Score

Visitor ✭ ✭ ✭
# 1
Visitor ✭ ✭ ✭

Hello,

 

I have become very interested in the auction mechanism that Google uses in it ad auction but I consistently run into the same dilemma in comprehension when the QS is added.

 

It has been shown that Google uses a Second Price Auction (when QS is not a factor) where the user does not pay his bid but instead pays the bid of the second person. This is understood completely.

 

In reality, however, we know that the auction computes an Ad Rank that sorts the advertisers using the formula (max bid * QS). Therefore, the price an advertiser (A1) pays equals: P1 = (b2*Q2)/Q1

 

Where b2 is the bid of the advertiser below them in the auction. (This formula is highlighted in detail by Google's Chief Economist Hal Varian in these two videos.) 

 

https://www.youtube.com/watch?v=qwuUe5kq_O8

https://www.youtube.com/watch?v=CT2k4z0xPwE

 

My question, therefore, is does the integrity of the second price auction hold when the QS component is added to the auction. In theory, the bid of advertiser 2 (b2) can be less than the bid of advertiser 1 (b1) and still attain a higher position given their various quality scores. What bid price would be charged to each user? Does advertiser 2 get charged P2=(b1*Q1)/Q2 since advertiser 1 is directly below advertiser 2.

 

Any information would be extremely helpful. 

 

1 Expert replyverified_user
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Marked as Best Answer.
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Accepted by Theresa_Zook (Top Contributor Alumni)
September 2015

Re: Second Price Auction when adding a Quality Score

Top Contributor
# 2
Top Contributor

Hello;

I did not watch all the video, but I assume the examples given are similar to examples on other videos by Hal Varian.

Anyway, the equation you provided is a simplified version of the complete formula. This equation represents the "equilibrium state" in which both  the ad ranks of two advertisers are equal.  To let one advertiser wins  a higher position,  one cent is added to the price.

 

Another factor to remember is that ad-rank has  a new component: extensions. If two advertisers have the same (classic) ad-rank, the one with better performing extensions will win a higher position.

-Moshe

Moshe, AdWords Top Contributor , Twitter | Linkedin | Community Profile | Ad-Globe
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Marked as Best Answer.
Solution
Accepted by Theresa_Zook (Top Contributor Alumni)
September 2015

Re: Second Price Auction when adding a Quality Score

Top Contributor
# 4
Top Contributor

As for your first question: Here is another classic video by Hal Varian. Watch time stamp 5:25

As for your second question: No. Google does not disclose the details / exact components of the formula.

 

 

 

 

Moshe, AdWords Top Contributor , Twitter | Linkedin | Community Profile | Ad-Globe
Did you find any helpful responses or answers to your query? If yes, please mark it as the ‘Best Answer’

View solution in original post

Marked as Best Answer.
Solution
Accepted by Theresa_Zook (Top Contributor Alumni)
September 2015

Re: Second Price Auction when adding a Quality Score

Top Contributor
# 2
Top Contributor

Hello;

I did not watch all the video, but I assume the examples given are similar to examples on other videos by Hal Varian.

Anyway, the equation you provided is a simplified version of the complete formula. This equation represents the "equilibrium state" in which both  the ad ranks of two advertisers are equal.  To let one advertiser wins  a higher position,  one cent is added to the price.

 

Another factor to remember is that ad-rank has  a new component: extensions. If two advertisers have the same (classic) ad-rank, the one with better performing extensions will win a higher position.

-Moshe

Moshe, AdWords Top Contributor , Twitter | Linkedin | Community Profile | Ad-Globe
Did you find any helpful responses or answers to your query? If yes, please mark it as the ‘Best Answer’

Re: Second Price Auction when adding a Quality Score

Visitor ✭ ✭ ✭
# 3
Visitor ✭ ✭ ✭
Moshe,

Thank you for the reply.

Am I still correct in stating that the auction is run in the form of a second price auction?

Also, do you know of a place where I can find the complete formula or is that proprietary information held by Google?

Thank again
Marked as Best Answer.
Solution
Accepted by Theresa_Zook (Top Contributor Alumni)
September 2015

Re: Second Price Auction when adding a Quality Score

Top Contributor
# 4
Top Contributor

As for your first question: Here is another classic video by Hal Varian. Watch time stamp 5:25

As for your second question: No. Google does not disclose the details / exact components of the formula.

 

 

 

 

Moshe, AdWords Top Contributor , Twitter | Linkedin | Community Profile | Ad-Globe
Did you find any helpful responses or answers to your query? If yes, please mark it as the ‘Best Answer’