EECS 485 Lecture 22
Ads and Auctions
John Kloosterman
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Learning Objectives
• Describe the types of online advertising
• Differentiate high- and low-quality ads
• Operate auctions, including first- and second-price sealed bid auctions, that are used when selling web ads
Online advertising
Why advertise?
• Ads help you sell more product or make more money • Easier to find your product
• Brand image above generic
• Paper: “The economic analysis of advertising”
• Ads are a big waste of money?
• I have to advertise because my competitors do, but the end
result is pretty much the same as if nobody did • Ads create value for consumers?
• Helps me know what my options are. If I have $10, how do I want to spend it?
• Makes content like news free, which is worth more to me than annoyance of seeing ads?
Banner ads
• Show everyone the same ad
Contextual ads
• Customize ads to page/user
• Automatically analyze a page to
see what it’s about
• Analyze a user to know what they are likely to click on
• Put a box “ad goes here” and ad network figures out the best ad
Search ads
• Secret: people are telling you what they want to find
Where the money’s at
• Google revenue: they own the largest contextual ad and search ad business
Ad Quality
What is ad quality?
• Content not random
• When you click on it, you
go somewhere expected
• Ideal world: “I’m glad I saw this ad today”
Say hi to partner
Partner Questions
• What’s an example of a “good” ad and a “bad” ad you’ve seen recently?
• Why was it good/bad?
Advertisers’ interest in good ads
• Good ads drive purchases, bad ads are ignored
• Bad ads harm brand image
• Good ads are targeted to just the people who wouldn’t have bought your product but might because of the ad
• My YouTube: Facebook Messenger ads. Doesn’t matter how well-produced they are or how many times I see it, doesn’t change whether I’ll install Messenger or not.
Google’s interest in good ads (Seller)
• Ad blocking
• If you hate ads, you’ll block them
• Faith that good ads actually add value to consumers
• They will increase your cost to bid on ads if your ad is bad: https://support.google.com/google- ads/answer/140351?hl=en
Your interest in good ads
• Is a world with no online advertising better than one with it?
• Least annoying/harmful as possible
• No malware/Bitcoin mining ads
• Arms race: ads are competing for attention
Anti-adblock
• Do I visit the site if it forces me to turn off ad blocker?
• My answer: usually no
Partner question
• Why is advertising so common on the Internet?
• If we banned online advertising, how would the Internet change?
Why auctions and advertising
• How much should I sell an ad on my page for? • I don’t know
• But businesses paying for advertising know
• Auction: process to discover a price
• Every time an ad is shown, an auction takes place to decide how much the advertiser will pay
How auctions work
• I say what I have to sell
• Everyone who’s interested has a competition where they say how much they’re willing to pay to buy it
• Say a price, and highest gets it
• Start at a low price, increase until only one person wants
• Strategy
• Seller wants most money possible
• Buyers want to spend least possible
Example auction
• Auction format: 3 buyers
• buyer 1 names a price, then buyer 2, then 3.
Partner Question
• Auction format: 3 buyers
• buyer 1 names a price, then buyer 2, then 3
• Question: what do buyers 1 and 2 need to do that buyer 3 does not?
• Why is this bad for the seller?
Why was this bad?
• Strategic behavior: everyone had to do a lot of thinking about the other
• Missing Information: if they did the auction over again, would have bid different amounts
• Misallocation: At the end of the auction, the wrong person won. Buyer 2 should talk to Buyer 3 to buy it from them.
• The seller could have got much more money
Sealed-bid first price auction
• Everyone submits a bid, doesn’t tell the others
• The person with the highest bid pays what they bid
Buyer 1 Buyer 2 Buyer 3 $100 $500 $400
Willing to pay
Sealed-bid first price auction
• What happens if we have the auction many times? • People bid less than they are willing to pay
Buyer 1 Buyer 2 Buyer 3 $100 $500 $400
Willing to pay
Sealed-bid second-price
• Get same long-term outcome, but incentive to bid true value and no strategic thinking needed
Buyer 1 Buyer 2 Buyer 3 $100 $500 $400
Willing to pay
Google search advertising auction
Willing to pay
Buyer 1 Buyer 2 Buyer 3 $1 $5 $4
https://support.google.com/adsense/answer/160525?hl=en
Sample Exam Question (F21)
Grace is bidding for a new mechanical keyboard. The seller receives these bids, in the following order:
• Jacob: $80
• DeOrio: $65 • Grace: $90 • Jared: $65
• Nanki: $30 • Alice: $55
Grace wins the auction and pays the seller $80. What type of auction is this?
Learning Objectives
• Describe the types of online advertising
• Differentiate high- and low-quality ads
• Operate auctions, including first- and second-price sealed bid auctions, that are used when selling web ads
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